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PP and PE markets set for further hikes in Europe, but clouds remain over derivative demand

by Manolya Tufan - mtufan@chemorbis.com
  • 02/10/2023 (01:50)
Regional players in the PP and PE markets are bracing themselves for another round of hikes in October. Despite the bleak demand outlook, resin prices will follow upstream markets higher, with monomer expectations calling for increases and putting pressure on producer margins.

While PE markets will likely extend the rally into the third month in October, it will be the second straight month of hikes for PP. Indeed, it seems more likely for PE prices to post solid increases than PP based on the market feedback.

Producers may seek hikes larger than C2, C3

European producers face razor-thin or negative margins due to high production costs, while lowering run rates helped to cancel out lethargic end user demand but also put a burden on producer margins. Hence, suppliers may try to seek hikes beyond the expected monomer increases to improve their margins.

As can be seen in the below graph, producers could only slightly improve their margins in September, while the delta was actually below average looking at the historical data. The monthly average of PPH prices in West Europe was €95/ton above the propylene settlement for September. Since propylene contracts will likely settle €50-70/ton higher, PP prices should also be raised to avoid eroding margins.

Most players think that only monomer hikes will be reflected on October PP deals, citing poor end markets amid the low season for many applications.

FD–NWE–PPH–Propylene–Margin

When it comes to PE, producer margins remained in the negative territory even if suppliers managed to achieve increases surpassing the ethylene hike for September. The monthly averages of LLDPE C4 film and LDPE prices were €55/ton below the September contract level, while HDPE film stood €35/ton below the monomer settlement.

FD–NWE–LLDPE–Ethylene–Margin

Limited imports, lower availability within the bloc and supportive costs will propel PE markets higher in October. Players reported import supplies for especially LLDPE C4 film are tighter due to lower capacity in the Middle East.

Some PE producers have already made it clear that they are planning to seek increases of up to €100/ton to recoup their margins. October expectations call for €50-80/ton hikes for ethylene, meanwhile.

October may see a similar trend to September, when some PE grades absorbed larger gains than the ethylene’s outcome depending on supply levels. Still, this is still controversial due to patchy demand. Buyers expect only monomer hikes to pass on October deals as they are mainly covered and have no rush to place orders.

How long can it last without demand?

Since commodity markets are in a precarious balance between the bulls and the bears, the sustainability of uptrend is under discussion. There appear more clouds on the horizon with record high interest rates fanning concerns of an economic slowdown.

Indeed, converters have been reluctant to stock up material despite firmer expectations for October. The main issue is the slower consumption in derivative markets compared to the previous years amid financial challenges. Participants remarked, “We are not out of the woods yet, so we exclude a real pickup in demand in the short term.”

Last but not least, wariness over higher utility costs during winter also lingers, although Europe’s gas storage is deemed high enough for an uneventful season. In case of utility costs climbing higher, energy use may reduce further amid a plunge in demand caused by high inflation and could lead to contraction in the industrial activity.

Imports weigh on Nov outlook

Current import offers are not offering a competitive edge as they have also posted increases, coming nearly at par with the local ranges. However, previously-secured cargos at lower prices during summer will start arriving from November. The arrival of these cargos coupled with year-end sluggishness will weigh on prices towards late Q4 despite a promising upstream chain. That is to say, October may be the last month of increases.

A distributor reported, “Imports will arrive in late October and November. This will weigh on demand further. We do not exclude a softer trend from November-December.”
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