European PP, PE markets brace for steep falls again as ‘perfect storm’ brews

European players are bracing themselves for another round of 3-digit drops in September as trading activity has been slowly resuming after summer holidays. Polyolefin markets remain on a shaky ground as energy costs have spiked to fresh highs, hefty drops are projected for monomer contracts, consumption has been hit hard by rampant inflation and European producers have started to reduce capacities gradually.

PP sees larger drops than PE since May

European PP and PE markets reversed direction in May and have been on a downtrend since then, witnessing 3-digit drops in the past four months. Sharp decreases pushed prices to only 19 month-low, according to ChemOrbis Price Index.

PP prices posted sharper drops than PE grades, while all products hit their lowest levels since February 2021. To put it into perspective, spot PPH and PPBC inj. fell by 33-34% or around €750/ton since May. Spot LDPE, LLDPE C4 film and HDPE film prices recorded respective drops of 28% (€625/ton), 26-27% (€500-550/ton) and 23-24% (€450-470/ton) during the same period.

Although this obvious slump in the spot market has far outpaced the drops registered in monomer contracts, , regional markets remain elevated. This is because they are still carrying a huge premium over other global markets, particularly China.

Accordingly, polyolefin markets are set to extend losses into the fifth consecutive month in September amid a slew of bearish factors.

Supply far outpaces demand, hopes pinned on run rate cuts

Regional producers evaluate rate cuts to realign with reduced consumption and alleviate cost burden. However, stocks are still ample across the region due in part to the aggressive import volumes and piling stocks at producers. Participants suggest that it will take some time for the prevailing stocks to dry up even if production rates are lowered.

According to a letter seen by ChemOrbis, Dow Chemical announced that they trimmed global PE production by 15% in response to port and rail congestion in the US Gulf Coast and logistical clogs in Europe. We also expect these actions to help balance elevated inventories in warehouses and at key ports around the world and its logistics resiliency, particularly in the USGC ahead of the most active part of the annual hurricane season in the US, the letter said.

As a side note, supply chain issues became less of a concern for companies grappling with demand slump. Indeed, global freight rates will continue to gradually come down amid lower vessel utilization as inflation cools consumer demand across the board.

Europe monomer outlook murky: Huge disparity between spot and contract

Participants point to the disparity between contract levels and spot monomer prices. Weak derivative demand caused monomer supplies to lengthen despite planned and unplanned cracker outages. Spot propylene prices currently stand €850/ton below August contract level, while ethylene prices are €600/ton below the monthly contract level for August.

September olefin contracts are expected to settle with 3-digit drops, with potential drops of up to €120/ton for ethylene and €170/ton for propylene. Moving into Q4, players rule out the possibility of seeing hikes in monthly monomer settlements unless spot prices spike.

Energy spikes feed into inflation

Energy security during the winter season is a foremost concern for European players as supply curtailments will trigger further hikes in energy costs and lead to gas rationing.

Analysts agree that energy shortage will add fuel to inflation and regional economies may succumb to recession, with the cost of living crisis stemming from high energy and food prices worsening in winter. As consumers look to economise amid higher household energy bills, they cut back on non-essential spending such as clothing, electronics, and home goods.

As inflation bites, downstream sectors including construction, automotive and textile are witnessing a slowdown. Manufacturers lamented about not being able to reflect surging energy costs on their end products due to weakening consumer demand and falling resin prices.

No recovery on horizon in Q4

That is to say, there is little chance to see a substantial demand recovery until year-end, which can prop up prices or push them higher. Output cuts in response to soaring utility costs would avoid piling stocks rather than causing jitters about supply.

Still, the hurricane season in the US will be under close watch as it may turn the tide or at least hinder price erosion to some extent.