As global uncertainty around the invasion of Ukraine and the COVID-19 pandemic continues to affect polymer resign pricing, Mike Boswell gives his analysis.
Market expectations at the beginning of Q1 2022 were of a situation in which the high polymer prices experienced for the last 18-months and the difficulties impacting the global logistics industry would at least show some signs of easing. Whilst the Russian invasion of Ukraine is causing concern about the supply of crude oil and natural gas, recent outbreaks of COVID-19 in China and the far east are dampening these expectations, with concerns about further lockdowns resulting in diminished energy demands. The graph below shows the reaction of the crude oil market, over the February and March periods, to these conflicting price drivers.
The reaction of the crude oil market, over the February and March periods, to conflicting price drivers.
Many suppliers of polyolefin and styrenic polymers reacted to the developing situation in Ukraine by implementing mid-month price increases, and shutting order books early. Given the crude oil price volatility, many plastic converters were understandably critical of the firm action that polymer producers have adopted.
As March began, the prices of key monomers were significantly hiked with C2 (ethylene) and C3 (propylene) hitting record highs. Due to the energy intensive nature of polymer production, many producers sought to apply energy surcharges in addition to passing through the increased cost of the respective monomer feedstocks.
In March the prices of key monomers were significantly hiked with C2 (ethylene) and C3 (propylene) hitting record highs.
It looks as if, for many polymer converters, the very same energy cost increases along with input cost inflation may prove so severe that they will choke production output in order to stem their own financial losses, as margins could even become negative after variable costs are accounted for. Such restriction in demand could, in theory, result in surplus supply of polymer raw material from which the change in supply/demand balance could result in a much-wished-for reduction in polymer pricing. That said, polymer producers may well adapt output to ensure that market conditions remain in their favour.
A further potential issue could be the imposition of sanctions on the import or sale of Russian origin PE or PP. It appears that material from Russia has gained a significant share of the European market, typically taking up much of the void in PE from US origin supply resulting from high US domestic prices, strong demand, and the aftermath of the winter 2020/21 storms in the Gulf Coast region.
Source: S&P Global Insights
Material from Russia has gained a significant share of the European market, typically taking up much of the void in PE from US origin supply resulting from high US domestic prices, strong demand, and the aftermath of the winter 2020/21 storms in the Gulf Coast region.
The dynamics of trade sanctions on polymer imports are varied, depending upon whether the UK acts unilaterally, the UK and the EU27 act in unison and what, if any, countermeasures Russia imposes on the UK, the EU27 or both the UK and the EU27. There is of course adequate PO production to meet global demand, and whilst trade flows would equilibrate to meet demand, there could be considerable short-term disruption if sanctions were imposed, most particularly for consumers of more specialist grades.
Whilst at the time of writing there has been some easing in the tensions resulting from the hostile invasion of Ukraine by Russia, the conflict is far from resolved and further geopolitical tensions are likely to arise before the matter is settled. Furthermore, the impact of COVID-19 on the global economy is gradually becoming less severe as authorities and individuals increasingly accept the virus as endemic.
Erratum: The print version of this article, published in British Plastics & Rubber, April 2022, features a typesetting error in the opening paragraph. The corrected sentence should read (as above): Whilst the Russian invasion of Ukraine is causing concern about the supply of crude oil and natural gas, recent outbreaks of COVID-19 in China and the far east are dampening these expectations, with concerns about further lockdowns resulting in diminished energy demands.