Impending supply limitations keep PP, PE outlook firm in Europe

July has seen a stable to slightly firmer trend in the regional polyolefin markets, staging a mild reversal after 3 months on the back of disruptions in the supply chain rather than a surge in demand. Although the market is not structurally tight, the looming supply limitations have bolstered a bullish sentiment for August and September, outweighing the summer lethargy.

Approaching turnarounds provide additional leverage for increases

Producers are contemplating raising their offers in both August and September, citing a lack of competitive pressure from imports amid maritime hurdles. Extended transit times and surging freight rates from South Korea rendered PP unattractive, while rising export prices from the US following Hurricane Beryl also caused PE offers on the low end to disappear from the market. High-priced non-European origins undoubtedly encourage regional suppliers to preserve their premium via lifting their offers.

Despite import tightness and regional production hiccups, there have been no heightened supply concerns during July. Yet, impending turnarounds at regional plants will crimp supplies further, alongside disciplined rate cuts and ongoing force majeures. Bearing this and firmer outlook in mind, some PE suppliers closed their order books for LDPE in the week ending on July 19.

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European producers strive to protect margins

Profitability concerns have been on the agenda for a while now, with the challenging environment and cost pressures taking their toll on producer margins across Europe. This prompted several producers, suffering from thin margins, to take strategic decisions to permanently close their inefficient and high-cost production lines.

Indeed, Sabic and ExxonMobil announced closure plans back in April. While layoffs were already anticipated as a strategic measure aimed at enhancing competitiveness and operational efficiency, ExxonMobil has recently decided to downsize its Belgium LDPE plant by early 2025.

LyondellBasell had earlier decided to permanently close one of its PP plants in Brindisi, Italy, while the decision was implemented as of early 2024. BASF plans to cut expenses at its Ludwigshafen complex housing two naphtha-fed steam crackers.

Cost-reduction initiatives are prominently dominating the outlook in Europe, with petrochemical producers aiming to align capacities with market needs amidst low plant operating rates. Hence, it is straightforward to say that regional suppliers are expected to maintain firm pricing strategies to protect their margins.

Players question feasibility of larger Aug hikes

More suppliers put an order stop on their PP and PE grades amid firmer outlook as concerns over supply chain disruptions took center stage, with dwindling stocks at some producers and planned turnarounds on one side and import limitations on the other side.

As for August, possible hike attempts matching or surpassing the expected hikes in the monomer settlements may be seen. Spot ethylene and propylene on FD NWE basis posted cumulative increases of around €30-60/ton since early July in response to maintenance turnarounds at crackers, even though Brent oil prices fell as low as $81/bbl before rebounding on Wednesday. Ethylene and propylene contracts are expected to settle €20-40/ton higher for August.

Polyolefin producers aim for larger increases to recover their margins, adding €10-20/ton hikes on top of the monomers both in August and September. A major producer reportedly plans €50/ton hikes both for August and September, while other producers also mull over modest hikes next month.

However, some players are skeptical about workability of larger August increases given that demand will set the tone amid summer vacations. They expect increases matching the monomer upsurge to pass on deals at the end.

Sept outlook remains strong

There is a strong likelihood that September will see renewed attempts to hike prices once buyers are back to replenish their stocks following the summer break period. The ongoing turmoil in the Red Sea and projections by experts about the prolonged logistics crisis into early 2025 suggest that immediate supply relief is unlikely, with little chance of seeing dramatic drops in freight rates until at least Chinese New Year in late January 2025.

A lack of imports will coincide with autumn turnarounds at upstream and downstream units in Europe as well as a potential demand surge post the summer, while resilient upstream costs may also provide additional support.