A spate of force majeures in the polymer markets this year has boosted polymer prices and made record profits for those producers able to convert ethylene gas — the main feedstock — into polyethylene — the main plastic.
But at the same time it has soured relations between buyers and sellers in markets where trust and relationship is key.
It is also threatening to undermine the very trading structure many of Europe’s biggest companies rely on for secure supply of plastics that go into packaging.
During the first four months of this year seven companies have declared force majeure at 14 polyolefins plants impacting plants that account for 19% of polymer capacity.
The supply shortage has pushed the price of low density polyethylene up to a record high of Eur1,525/mt FD NWE.
The margin of producing LDPE touched a high not seen since Oct 22 2008, at Eur483/mt on April 1.
In a sign of tension between buyers and sellers, last month, Europe’s biggest packaging association cast doubt on the validity of the force majeures, saying suffering merely technical problems at plants was not a good enough reason to default on contracts and instead urged producers to act in a “spirit of partnership.”
A few days later, oil major Total declared Europe-wide force majeure on all polypropylene grades, angering other consumers.
A big European buyer of plastic pellets this week said there was no value in long-term contracts to buy resin any more, but there was little else choice at the moment due to a collapsing euro/dollar exchange rate that has made importing material very expensive.
“What good is a contract if you don’t get the supply?” he said, requesting anonymity for fear of worsening relations with his suppliers.
Other converters have accused producers of “profiteering” at a time when supply is tight and stocks are very low.
There was no formal response from producers throughout April, but privately, one of the biggest producers of plastics in Europe told Platts that business relations had become “very sensitive.”
“We have heard the accusations that we are not fulfilling our contracts, but exporting material instead. But this is not true,” the producer said.
Two other buyers of petrochemical products have said privately they have considered taking legal action against sellers of petrochemical goods, but are fearful of the long-term consequences in a market that is built on long-term relationships.
“You start to complain too much and you can kiss goodbye to your resin,” said one buyer.
But while buyers vent anger, many say in reality there is little they can do to shift suppliers, particularly when availability of imported material is sporadic and at the mercy of exchange rates that currently do not favor buying in dollars.
Converters that turn resin into film need security of supply to ensure they do not default on their biggest clients, which range from huge pharmaceutical companies to European supermarket chains.
“People don’t realise it, but we are locked in this relationship and there are no imports,” one converter said.
In the longer term, things are expected to change as converters may have a wealth of suppliers to tap for product.
US and Middle East suppliers are likely to have a surplus of resin following the expansions in both regions.
Over the next five years, additional crackers are expected to come online in the two region adding a huge amount of capacity.
At the same time China is turning to non-petroleum routes for plastics, which will reduce its dependency on Middle Eastern product. Global ethylene production is expected to grow from 139 million mt in 2014 to 194 million mt by 2024.
Platts Analytics forecasts that the European PE trade deficit will rise to just over 4 million mt by 2025 from 1.1 million mt in 2014.
That remains a distant prospect and converters, who are now scrabbling around for pellets to satisfy their own supply contracts, doubt whether they will seriously displace traditional contract pricing, which involves buyers and sellers agreeing annual deals on volume, but negotiating price on a monthly basis.
This is because many value security and quality of supply over price.
Nevertheless, relations are said to at an all-time low.
“They are using the fact that they are tight on the market and that they have lost too much money [in the past],” the third converter said.
Meanwhile, producers agreed that poor run rates in the past have affected the force majeures, but largely by incentivizing them to run at higher run-rates than they are used to after years of underinvestment.
“Industry rates ramped up to an unsustainable level which is why there are so many force majeures. We’ve rationalized many plants in the past because of abundance of imports. [The imbalance] is just a short-term issue. Underlying demand not too great. We haven’t run at these levels for three to four years,” another producer said.
