MARKET REPORT Polymer raw material prices: 2017 review and 2018 outlook.
From a raw materials supply perspective, 2017 was relatively quiet by historical standards. Whilst for many the difficult supply situation that started in Q1 2015 still remains a bitter memory, the reality was that, in the main, availability improved further in 2017. The prices of the more volatile materials remained relatively high, which in part is the reality of currency devaluation in a market where prices are Euro and USD denominated, and has resulted in relative price inflation compared with those trading in Euros as a principle currency. BREXIT remained a very significant topic, and the result of the June General Election caused further concern as the Conservative Government failed to achieve the mandate it sought. Furthermore, as the potential ramifications of BREXIT at an industry level became increasingly clear, the scale of the challenge of exiting the EU has started to be realised.
The table below confirms that price volatility in the polyolefins sector was relatively low, with prices at a marginally lower level than the prior year. Given that the BREXIT devaluation of the GBP was only a factor for the second six months versus the whole of 2017 it is clear that in the defacto Euro denomination prices have in fact fallen somewhat further, but in the UK this effect is offset by the weaker GBP versus Euro exchange rate.
Polyolefins Basket Min Max 2011 [pounds sterling]1,027.83 [pounds sterling]1,165.32 2012 [pounds sterling]1,266.53 [pounds sterling]1,540.67 2013 [pounds sterling]1,259.20 [pounds sterling]1,611.59 2014 [pounds sterling]1,392.99 [pounds sterling]1,540.56 2015 [pounds sterling]1,442.26 [pounds sterling]1,571.24 2016 [pounds sterling]1,401.78 [pounds sterling]1,569.30 2017 [pounds sterling]1,393.60 [pounds sterling]1,521.24 Average Range Volatilty 2011 [pounds sterling]1,165.32 [pounds sterling]137.49 12% 2012 [pounds sterling]1,396.54 [pounds sterling]274.14 23% 2013 [pounds sterling]1,411.46 [pounds sterling]352.39 29% 2014 [pounds sterling]1,463.95 [pounds sterling]147.56 12% 2015 [pounds sterling]1,481.49 [pounds sterling]128.98 10% 2016 [pounds sterling]1,474.99 [pounds sterling]167.52 13% 2017 [pounds sterling]1,426.86 [pounds sterling]127.64 10%
One of the most significant volatility factors was the hurricane season affecting production in the US Gulf Coast area. Nowhere was the impact of storm Harvey and its siblings more evident than the spot and contract prices of styrene monomer, which rapidly increased on the fear of supply shortages, only to settle back down quite quickly after normal production was resumed.
ENGINEERING POLYMERS SEE INTERESTING CHANGE
Possibly the most interesting change in 2017 has been in the arena of engineering polymers, where increasing input costs combined with a significant change in the supply/demand balance has resulted in significant price inflation. PMMA was one of the first materials to be affected by this phenomenon, but all other standard engineering polymers including, PA6, PA66, PBT, ABS, POM and PC have followed suit. In the case of PC, prices are heading back towards historical highs and this situation is likely to replicated throughout this material group.
The price of crude oil increased steadily in the later part of 2017, having dipped mid-year on the basis of high production and excessive inventories. The weakness of the USD is evident as an inflation factor throughout the second half of the year.
It is not surprising to see naphtha, ethylene and propylene follow a broadly similar trajectory to crude oil pricing as feedstock producers seek to maintain their own margins.
The exchange rate dynamics changed significantly in 2017 and, whilst the impact of BREXIT on the GBP/Euro exchange rate continued to be the dominant force, the USD came under pressures as concerns grew about America's prospects under the Donald Trump Republican presidency.
THE UK ECONOMY EFFECT
Despite the continuing BREXIT issue, the UK economy continued to perform well in 2017, with further increases in employment rates and positive economic growth. Inflation, fuelled by the BREXIT devaluation of the GBP, became a concern and eventually the Bank of England bowed to increasing pressure and raised its interest rates by 0.25 percent to 0.75 percent, with a strong caveat that it would take a cautious approach to further increases as it was unclear how sensitive the economy would be to interest rates hikes, after almost a decade of record low rates. Within the manufacturing sector, plastics were again noted for their strong performance; supported by a fairly robust automotive sector and stability in the housing and construction sectors.
Monomer Prices Movement ([pounds sterling] GBP per tonne) January-17 Change (Contract) C2 (Ethylene) [pounds sterling]0.00 C3 (Propylene) [pounds sterling]17.66 Styrene [pounds sterling]0.00 Benzene -[pounds sterling]48.56 Brent Crude [pounds sterling]17.70
There was strong anecdotal evidence that the devaluation of GBP following BREXIT has continued to reduce import penetration and this is increasing the amount of domestic manufacturing; given the relatively low CAPEX barrier to entry the plastics sector is in a good position to continue to benefit from this effect. Although, as capacity becomes fully utilised the twin effects of economic uncertainty and the increased cost of imported plant and machinery growth may be restricted by the willingness to make long-term investments.
From the perspective of polymer producers, 2017 looks a big success with strong margins and good levels of demand. For those producers integrated upstream into oil refining and production their plastics downstream activity has been a strong source of revenue and profit.
It looks like the year ahead is going to be interesting and already it is possible to see some important trends emerging. There will, of course, be the usual smattering of unknowns/not anticipated effects and for some the possibility of a global economic slowdown looms large on the horizon. In the case of engineering polymers, the current trend of price inflation looks set to continue. Whilst it has been some time since similar circumstances have prevailed, the expectation would be a gradual rise towards a peak, which could occur in H2 2018, followed by an extended period of stability after which there is a gradual decay in price as competition for volume/market share increases. It is not expected that engineering price inflation will have a consequential effect for the ultra-high performance polymers, as these materials are typically independent of the supply/demand drivers and prices are more likely to broadly follow more general inflationary pressures.
The styrenics polymers group, including polystyrene and ABS, is likely to remain volatile, with benzene and, consequently, styrene, monomer prices being a driving force. However, as is the case at the beginning of 2018, supply/demand can affect any part of the pricing model and this is clearly driving ABS and specialty styrene polymer prices upwards at this time.
Perhaps one of the most significant factors that will impact the polyolefins sector will be the increase in shale gas-derived polymers from the USA. Although the economics of these plants don't look quite as attractive as when oil was $140+ per barrel, the profit margins still look good. The fact is that the capacity coming on stream is causing the supply/demand balance to dominate price action, with a near certain glut of material appearing on the market during the course of 2018. At this stage, the expectation is that the initial impact of these new capacities will be quite modest in Europe, as the new plants are owned by producers who have existing sales infrastructure in the region and are therefore are unlikely to be disruptive. However, it should be noted that the current expansion is in PE and not PP and the movement in the January 2018 monomer price may be symptomatic of a paradigm shift in the relative economics of these two important materials; untypically C3 (Propylene) prices increased whereas C2 (Ethylene) prices rolled over. In the market, there were strong rumours that PE cargoes were arriving imminently and this appeared to undermine the confidence of producers to push through either monomer or polymer price increases. The divergence of PP and PP pricing is likely to be a continuing trend as European polyolefin producers seek greater contribution from the more exclusive PP value chain.
The graph on the bottom right clearly depicts the strong historic correlation between oil, feedstock and standard polymers pricing. The 2015 situation now looks to be exceptional with a 'normal' relationship restored since about October 2016.
In addition to the expectations outlined above, there will of course be the 'unexpected' events to contend with. However, I hope to repeat the fairly reliable forecasts that I have provided in prior years and so enable you and your business to be better equipped to deal with the challenges of sourcing your polymer raw material requirements in the year ahead.
This report is produced based upon the following fundamentals: -
* EURO based pricing for feedstock and polymer pricing
* Conversion of Euro and USD based prices at prevailing exchange rates
* Product baskets weighted according to UK consumption
Thanks to the following organisations: - PIE (Plastics Information Europe) www.pieweb.com HM Treasury www.hm-treasury.gov.uk
The information provided in this report are based upon data available from both external an internal sources, and whilst care is exercised in producing this report we give no guarantee of accuracy. Furthermore Plastribution and British Plastics and Rubber accepts no liability for purchasing decisions based upon the information provided, as the petrochemical market is complex and volatile.
OUR ANNUAL MATERIALS REVIEW, MIKE BOSWELL LOOKS BACK AT THE MARKET AND REVIEWS HOW THE YEAR'S SIGNIFICANT EVENTS, SUCH AS HURRICANE SEASON IN THE US AND BREXIT CLOSER TO HOME, AFFECTED OVERALL PRODUCTION, SUPPLY AND PRICING, AS WELL AS OUTLINING WHAT THE INDUSTRY CAN EXPECT IN 2018.
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|Comment:||MARKET REPORT Polymer raw material prices: 2017 review and 2018 outlook.|
|Publication:||British Plastics & Rubber|
|Date:||Jan 1, 2018|
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