With the exception of demand, the economics of polyolefin supply in the UK and Europe are likely to result in price increases in the second half of 2024, Polymerman (aka Mike Boswell) explains.
So far this year, weak demand for polyethylene and polypropylene has played into the hands of polyolefin converters with fierce competition across producer, trader and distribution sales channels to secure available volumes. However, this all looks set to change for the following reasons:
1. Logistics costs
As illustrated below, the Drewry World Container Index weekly weighted freight rate assessment of eight major east-west trades is again increasing quickly and the table below illustrates the cost premium per tonne based upon the shipping cost for a 40-foot container increasing from $2,000 to $6,000, which for lower value items such as polymer raw materials is fast becoming prohibitive for shipping product from Asia to the UK and Europe.
Polymerman
Polymerman
2. High liquid feedstock costs
A significant proportion of polyolefin production in Asia and Europe is based upon Naphtha feedstock. Not only is Naphtha significantly more expensive than gas feedstocks such as ethane from shale gas and propane, but Naphtha prices track crude oil prices which remain firm and are at the time of writing trending towards an increase. In the case of PP from countries such as South Korea, this inflationary pressure comes in addition to the increased logistics costs outlined above.
3. Increasing gas prices
Whilst ethane gas in the Middle East and ethane derived from Shale Gas in the US are amongst the lowest-cost feedstocks in the world, prices in the US have risen by 40% since the beginning of 2024. This, combined with robust domestic US demand for PE, has pushed up prices to the level that it is not economically viable to match current UK price levels. Since the US is now a significant source of LLDPE and HDPE for UK converters, this situation in and of itself is likely to tighten supply and move the market fundamentals more in favour of the sellers.
4. Low levels of inventory
Uncertainty breeds caution and resellers and converters alike have low inventory levels, which is also in part a consequence of high interest rates. The reaction to any increase in demand given limited inventory throughout the supply chain is likely to have a significant impact on pricing, and in July it was already becoming evident that converters were seeking to increase stocks in anticipation of increasing prices.
5. Underlying demand
Whilst converters continue to report weak downstream demand, it may be necessary to consider this in the context of exceptional demand during the Covid-19 pandemic and consequential capacity additions at many converters. More generally, there is a view that the underlying demand for packaging materials is improving as the post-pandemic supply chain destocking finally comes to an end.
Whilst prices are not likely to increase dramatically, for all the reasons outlined above, it is likely that there will be some polyolefin price inflation in the coming months.