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Insight: What will drive polymer markets from here? Demand or costs?

by Merve Sezgün -
by Esra Ersöz -
  • 27/09/2023 (09:35)
Global polymer markets are experiencing a paradox where prices struggle to increase, despite soaring costs, primarily driven by surging crude oil prices that have reached 10-month highs. This is because the vital demand element lies on the other side of the coin, and the demand scenario is far from ideal, hindering a robust price rally.

PP and PE prices have been gradually increasing for around three months in some key regions including China, Southeast Asia, and Türkiye. The European, Middle Eastern, and African markets have only recently joined this price rally, meanwhile.

On the other hand, in the case of PVC, prices have even witnessed decreases in India and Türkiye since early September. The markets were unable to sustain the upward trend for more than a month, completely disregarding the cost-related factors.

The challenge of high costs

Amid a supply deficit caused by extended production cuts from Saudi Arabia and Russia, Brent crude has remained above the $90/barrel mark for several weeks, further escalating production costs for petrochemical companies.

With crude oil prices skyrocketing, polymer prices would follow suit and react with visible gains under normal market conditions. However, today’s reality is more nuanced, as the oil rally has become a significant driver behind the challenges faced by the polymer industry lately.

Petrochemical producers, constrained by high costs and having already been forced to make unprecedented production cutbacks, find themselves in a tight spot. They are facing increasingly squeezed profit margins due to the lack of sufficient demand despite the ongoing supply cuts across the board.

The demand conundrum

The aftermath of the COVID-19 pandemic has cast a long shadow on global demand for polymers. While economic growth has stalled following the end of covid restrictions, the resurgence of certain sectors, such as automotive and construction, remains hesitant. These industries are significant consumers of polymers, and their tepid recovery contributes to insufficient overall demand.

China, hit by a slow growth, record youth unemployment, low foreign investment, weak exports and currency, and particularly a property sector in crisis, has been making extensive efforts to boost its economy through various stimulus measures. These initiatives are aimed at revitalizing domestic consumption and supporting its industrial sectors.

However, while China is actively trying to stimulate growth, Western markets are grappling with economic contractions and concerns of a looming recession. Their ongoing efforts to control inflation through interest rate hikes are causing a structural weakness in overall polymer demand.

Polymers’ dance between demand and costs

Such a combination of factors -rising costs, production cutbacks, and China’s efforts to stimulate demand- would typically lead to significant price increases for polymers. However, the current reality is quite the opposite. Price increases in the polymer markets have been surprisingly minimal, and in some cases, prices have even declined, primarily due to the absence of sufficient demand.

HDPE hits 6-month high in China; could it have risen that much without cost support?

In China, import HDPE film prices have witnessed a cumulative gain of 11% since mid-June, reaching their highest level in six months , according to data from ChemOrbis Price Index. During this same period, Brent crude oil futures have recorded a total rise of 27%, leading to a 22% increase in spot ethylene prices on a CFR China basis.

As of the week ended on September 22, the weekly average of CIF China HDPE film prices was assessed at $1010/ton. Brent oil hovered around $94/bbl during the same week.

Indeed, when historical data is analyzed, it is seen that HDPE prices were able to reach levels as high as $1260/ton in February-March 2022, a period when oil prices were above the $90/bbl mark. The market was supported by demand at that time. That’s to say, China’s HDPE market has the potential to increase much more if demand was here. In other words, prices couldn’t have risen to their six-month highs today without the underlying support of production costs.

European PP markets join the rally considerably later than others

European PP markets have been slow to catch up with the upward trend that began in other regions since June. Initial September offers were revealed with up to 3-digit increases across the region, after prices bottomed out from nearly three-year lows in August.

Although the market received support from mounting cost pressure and easing stock levels, the September hike requests were met with a lukewarm response from buyers, who remained skeptical about the feasibility of increases amid patchy downstream demand.

PVC in India and Türkiye: Prices disregard cost factor completely

In September, the PVC markets in India and Türkiye, the two key import markets, bucked the trend in the upstream supply chain due to sluggish domestic demand and the less favorable sentiment in Asia.

According to ChemOrbis Price Index data, the weekly average of import K67 prices basis has witnessed a cumulative decrease of 8-10% for the past five weeks in both countries.

In India, October offers showed up with $30/ton decreases from a Taiwanese major last week despite the larger drops of $60/ton having been awaited, with the recent rally in energy complex trimming the size of decreases. However, offers met with a lukewarm response from Indian buyers and the producer was reportedly having a hard time in selling out its monthly quotas.

Prices continued to weaken last week due to lackluster demand, which outweighed the global increases in crude oil and ethylene prices. Despite traders initially hoping that cost-related factors would maintain market stability in the coming month, most forecasts now indicate the likelihood of modest discounts.
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