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European PP, PE prices plummet; producers go for deeper run rate cuts

by Manolya Tufan -
  • 26/06/2023 (02:08)
Regional polyolefin producers are preparing to cut run rates at their plants further during summer period in an effort to keep domestic supply at reduced levels and balance weak demand, while spot prices have dipped to their multi-year lows. Even though production rates have been already trimmed since mid-2022, the market is flush with supply due to a significant demand destruction.

Major European producers have their summer turnarounds planned, while run rate cuts will go even deeper. In June, some producers have reportedly started to cut run rates as much as 50%, which is expected to last until September. The main goal of this is to rebalance inventories, considering summer turnarounds at manufacturers that are expected to last longer than usual this year amid poor derivative markets. Plus, producers aim to halt the downtrend at some point as resin prices reached critical levels squeezing producer margins.

 Europe accounts for one third of total PP production loss in June

According to ChemOrbis Production News Pro, more than 1.8 million tons of PP output is estimated to have been lost in June, with about 33% (around 600,000 tons) of the production loss coming from Europe. Up-to-date data suggest that 1.5 million tons of PP will be cut from the markets in July, with Europe accounting for more than 38% of the total production loss. Europe ranked as the second region with largest capacity losses, which were mainly attributed to the disciplined/deeper run rate cuts.

PP – Capacity – lost – reductions – closed – offline

PE markets also see substantial run rate cuts in Europe

When it comes to PE, around 714,000 tons of PE is estimated to have been removed from the European market in June, which accounts for the 41% of the overall production loss (around 1.7 million tons) globally. In July, the overall loss within the bloc is expected to be slightly larger at 720,000 tons. Up-to-date data suggest that more than 1.4 million tons of PE will be cut from global markets in July, as a side note.

Capacity additions are far less than production cuts

Global PP and PE markets are readying to face huge capacity additions in 2023. 3 million tons of new PP capacity out of the expected 10.2 million tons has already been commissioned so far this year. The global PE addition will be around 7 million tons throughout 2023, 4 million tons of which have already been launched. Yet, more existing capacities have been taken offline when compared to the arrival of new supplies.

As for PP, capacity additions on a global basis (calculated monthly based on the additional capacities from new plants commissioned within the current month and 6 months before and after the current month) are around 295,000 tons in June, which is quite less than offline capacities (more than 1.8 million tons) in June, according to ChemOrbis Production News Pro. The ratio of offline capacities to the installed capacities is estimated to have been much deeper at 19.5 percent compared to the ratio of new capacities to the installed capacities at 3.1 percent.

A similar scene is valid in the global PE markets, where around 340,000 tons of calculated new capacity is far less than the total estimated production loss of 1.7 million tons in June. The ratio of offline capacities to the installed capacities is estimated to have been deeper at 13 percent compared to the ratio of new capacities to the installed capacities at 2.5 percent.

PE – Capacity – addition – reductions – new – offline

It appears that run rate cuts will become the new norm across the board unless economies reel from the effects of the global economic slowdown. Global supply overhang will remain an issue in the upcoming period even in case of start-up delays, considering the weakness in underlying demand.

A major market participant opined, “We do not expect a solid recovery until September-October. The commissioning of the petrochemical plants may be delayed as demand recovery is not strong enough to absorb the capacity additions.”

The main culprit: Lower consumer spending

Consumer demand erosion has been the primary factor, paving the way for piling stocks of both resin and finished plastics products. Derivative sectors from packaging to automotive witnessed poor end orders as sticky inflation takes its toll on private consumption, which deterred converters from purchasing beyond their needs.

Softening expectations as well as summer holidays also kept players on the sidelines as manufacturing plants will be undergoing maintenance shutdowns lasting two or three weeks in the next two months.

Spot prices near critically low levels

July expectations call for additional decreases in line with weaker monomer projections that suggest €30-60/ton drops. The pace of declines is expected to moderate from the past two months as PP and PE prices already hit multi-year lows. Accordingly, July prices are likely to post €50-60/ton decreases.

Spot PPH and PPBC prices hit as low as €1000/ton and €1100/ton on FD Italy, 60 days basis, respectively. West European PP prices stood €50-100/ton above Italian ranges. As for LDPE, prices hit below the €950/ton FD level in Italy.

With squeezed producer margins, suppliers are not willing to concede to large discounts from now on. They are aiming to halt the prolonged downtrend through rate cuts, which may bear fruit once buyers return to replenish. Indeed, buyers may decide to secure some cargoes despite a lack of major improvement in demand as prices may find a floor between July and August ahead of a possible rebound as of September.
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