How sustainable are low European polymer prices?

In his column this month, Mike Boswell asks whether the low prices seen in the UK and Europe at the moment are here to stay, and looks at the factors that could influence change.

The price of standard polymers in the UK and Europe look low in comparison to the markets in the China, South East Asia and America. This situation is distinctly different to the ‘normal’ situation where prices in the Western European markets are either on a par or often at a premium.

In making comparisons between Western Europe and other regions it is essential to make a fair comparison so that there is proper account of terms on which the goods are sold. Typically, prices in Asia are quoted on a ‘CFR’ basis in which Cost and FReight are only covered to the port, whereas in Europe prices are quoted on an ‘FD’(FreeDelivered) basis referring to the fact that the seller covers all the costs to including delivery to the customer’s premises. As a rule of thumb, the average delta between FD and CFR is $50 / £37.50 per tonne.

The graph accounts for the difference between CFR and FD and clearly depicts a

significant swing in relative prices between Western Europe and Asia.

In most cases, large price deltas are unsustainable as either sellers increase the proportion of goods sold to the more lucrative markets, or traders take advantage of the arbitrage opportunity and start physically moving goods from the lower price region to the higher price region. The consequence is to create parity between the markets as prices rise and or fall.

Whilst in the case of traders physically moving goods from one region to another, account must be made of costs such as logistics and often import duties, once this hurdle is overcome there is often a commercial risk between agreeing the purchase contract and arranging the sale and, typically, this exposure is greater when goods are moved from East to West where buyers strongly favour pricing within the month of delivery rather than fixing prices for delivery in a future period.

In the current market it is important now to take account of the expectation of Western European buyers. Having ‘whetted their appetite’ through the arrival of some limited volumes of shale gas derived LLDPE back in March, their expectation is that further volumes of competitively priced product is ‘on the water’ and it is this sentiment that is likely to eliminate the physical arbitrage opportunity due to the significant market risk.

Whist this may delay price equilibrium (or a state close to that) ultimately the market will become normal and the $100 question is, if Western European prices are going up or prices in the rest of the World coming down? The outcome is likely to hinge on whether increasing oil (and feedstock) prices are dominant or if due to the new PE capacities in the US the global market moves into a situation of supply surplus.