Will Red Sea disruptions underpin a rebound in Europe’s PP, PE markets?

Regional polyolefin markets have been subdued as most players are yet to be back into harness following year-end festivities. Having left the market at multi-month lows, buyers are gradually resuming their activities amid flat monomer settlements. PP and PE markets have given a mild response to the Red Sea turmoil so far, although it is likely to encourage sellers to seek hikes going forward.

What has happened?

Several shipping companies have been avoiding transits through the Red Sea by around mid-December after Houthi attacks on commercial vessels forced them to take longer routes around the Cape of Good Hope, increasing shipping rates and adding to lead times.

Although Maersk resumed passages through the Red Sea after deployment of a multinational task force to the region, it did not last long as they decided to halt transits through the route until further notice following an attack on Sunday and their vessels will keep taking detours via Cape of Good Hope.

The highly escalated security situation in the region amid ongoing drone attacks on container ships by rebel groups rendered the route handling about 10% of global trade “costlier”.

Europe suffers the most from this crisis

Shipments from Asia and the Middle East to both West and South Europe have taken the largest hit as the Red Sea is the shortest passage for these routes.

According to Freightos, container shipping rates from China/East Asia to West Europe rose by 34% since early December while they surged by 51% to Mediterranean, although they eased somewhat in the previous week.

In real-time trading, traders are reporting much higher container prices at $4000-5000/FEU from Asia to Europe, suggesting much sharper increases from the pre-crisis period. CMA CGM also announced Asia - Mediterranean rates will increase to more than $6000/FEU on January 15. Carriers have also reportedly announced surcharges ranging from $500 to as much as $2700 per container.

But it creates no panic buying

Players will be fully back in the market from January 8, while recent logistics concerns have not triggered panic buying so far. As buyers have mostly closed the year with low stocks out of their expectations of murky demand, demand may be better than in December, the majority confirmed.

Market participants expect these would be driven more by cost pressures and restocking needs than a robust return of downstream demand. Demand for derivative products is expected to remain subdued well into the second half of 2024 as the euro area continued to witness dramatically reduced manufacturing output after its economy contracted by 0.1% in the third quarter of 2023.

Sellers mull over hikes

January ethylene and propylene contracts settled with rollovers, while it will take some time for official offers to fully be unveiled this month due to the lingering holiday lull. Expectations widely call for rollovers for PP given ample availability and weak downstream sectors. While only a limited number of PE offers emerged with rollovers, players do not exclude a stable to slightly firmer trend despite a lack of demand support.

Saudi HDPE and LLDPE supplies may tighten; eyes on US

Traders remarked that prices of LLDPE C4 film and HDPE may post small gains as a result of the disrupted trade flow from the Middle East, Saudi Arabia in particular.

According to 2023 data from ChemOrbis Stats Wizard, Saudi Arabia is the second largest PE supplier of the EU27 with a 20% share, following the US holding a 33% share. That is to say, any delays from Saudi Arabia may propel spot PE prices higher into Europe while the arrival of previously secured import cargos from the US will be closely tracked in a bid to compensate the potential disruptions from Saudi Arabia, as transits are smooth through the Trans-Atlantic route.

Saudi and Korean PP make up more than half of imports into Europe

Players are not expecting to see an immediate impact on LDPE and PP grades, as they are mainly produced within the bloc. ChemOrbis Stats Wizard also reveals that EU27’s PP imports are almost half of total PE imports. Noteworthy, the yearly PP imports of Europe is still not small, standing around 2 million tons, and Saudi Arabia along with South Korea form more than 50% of this market.

Although overall PP supplies are deemed ample nowadays, a disrupted supply chain from Saudi Arabia and South Korea will help regional sellers – who have been complaining about margin erosions for so long – hold the whip hand and seek larger price hikes in the local markets.

Will logistics woes pull prices out of the trough?

Players already concurred on the fact that polyolefin prices hit the bottom in December, when both markets plunged to multi-month lows. Blaming low margins, producers have already contemplated stemming further price erosion in January particularly on the bottom ends of the overall price range.

As mentioned above, suppliers will try to increase their offers, factoring in a tight supply outlook in case of delivery delays at a time when regional plants run at around 70% rates as well as rising container prices and insurance premiums. However, it remains to be seen whether these hike requests will be absorbed in January due to the weak demand.

According to some, January may be too early to see increases driven by rising shipping rates, but freight surcharges will surely pull prices up from February as it takes an extra two to three weeks to loop around Africa when the Suez Canal is avoided.