A cautious optimism is forming in the polypropylene and styrene-butadiene-rubber markets based on indications that the decline in the downstream European automotive sector could have found a bottom amid improved macroeconomic data, market sources said this week.
Over the last week, upbeat European economic data suggested that the European recession is more or less over, and that some European economies are showing signs of growth.
Traditionally, a higher standard of living, and higher GDP growth, is seen as supportive for growth in many segments of the petrochemicals industry.
The Eurozone manufacturing PMI, a key indicator of regional private-sector activity, climbed to a 26-month high of 51.4 in August, up from 50.3 in July, London-based financial information services company Markit said Monday. This was also the second consecutive month for eurozone manufacturing activity to be in expansion following 23 of contraction. An index figure below 50 indicates eurozone manufacturing is contracting and above 50 expanding.
In the month of August, European SBR prices have surged 11% or $175/mt to $1,730/mt from $1,555/mt FOB Rotterdam, while in the domestic truck market, parcels climbed 16% or Eur190/mt to Eur1,380/mt FD NWE, up from Eur1,190/mt, according to Platts data.
European SBR market participants were feeling more bullish about demand going into the fourth quarter as derivative automotive demand was seen picking up, market sources said this week.
SBR producers have been cautious about a rebound in demand, particularly because in June tire-makers cut capacity globally. Michelin announced in June that it would stop production at its Icollantas unit in Colombia in the summer, after repeated investment failed to stem 10 years of losses. This followed moves to close a truck tire facility at the Joue-les-Tours plant in France and the discontinuation of truck tire production at its Algeria plant.
With demand for tires globally at all-time lows recently, it was still too early to see a rebound in demand, sources said. As the Michelin plant closures suggest, it is unlikely that tire-makers would rush to restart some of their idled plants just yet.
“[Demand] is improving [but] I’m not expecting a hockey stick [shaped] improvement. The market is stable and there is no reason why it should go lower; I’m expecting further increases in future,” a butadiene producer said. “We have seen demand pick up a little and you have producers unwilling to sell vast quantities in the spot market [now]. They want to see how much goes through contracts. It is half-way. We are starting to see the tire guys coming in and taking volumes. Whether this is all sustained demand or restocking we will see,” the rubber trader cautioned.
“If demand is sustained through September, then there is a hope that will carry on through into October and November. However one SBR producer was still not yet convinced that demand had returned.
“We don’t … see [better demand] yet. The third quarter was worse than in Q2, according to one tire maker. For the time being, the market is steady in terms of demand. Good demand in Asia, especially in China,” an SBR producer said.
“It’s been a good September for exports. The non-tire [segment is] stable [in Europe] according to forecasts, [but] for Southern Europe we still don’t see [an improvement] yet,” the SBR producer said.
Although sales as measured by EU car registrations in Europe were still down year on year, the decline slowed in the second quarter to an average drop of 3.6% compared to a fall of 6% in Q2 2012, according to the European Automobile Manufacturers Association data. Year-on-year data, however, paints a slightly dimmer picture, with European Union passenger car registrations declining 5.6% to 1,134,042 cars in June, compared to June 2012, the lowest level since 1996.
European polypropylene spot prices experienced an increase from Eur1177.5/mt FD NWE at the beginning of April to Eur1207.5/mt FD NWE at the end of June, constituting an increase of 2.5%.
While the rise in polypropylene prices coincided with a slowing in the decline of sales as measured by EU car registrations, sources tended to justify the increase in polypropylene spot prices as being more significantly affected by other issues such as snug stock availability in the market.
Furthermore, some sources partly attributed the rise in polypropylene spot prices to widespread inventory replenishment, particularly seen during the month of May.
While the upswing in energy cost was believed by sources to have played a significant role in the increase in European polypropylene prices over Q3 2013 so far, this was not the case in the rise of polypropylene prices over Q2.
The pronounced falls in the upstream energy complex had a detrimental effect on polypropylene prices in the beginning of the second quarter, resulting in a stall in buying interest, and this contributed to the downside in polypropylene prices. In April, polypropylene spot prices experienced a reduction from Eur1177.5/mt FD NWE, to Eur1132.5/mt FD NWE.
In May, the jump in polypropylene prices was attributed by sources to low inventory levels throughout the value chain, which encouraged stock rebuilding efforts. Furthermore, some of the converters spoken to in May did not report any significant improvement in underlying demand, and they continued to report low volumes from end-user markets.
Sales volumes in June, although not as dynamic as May, were believed by sources to be in line with expectations. Firmer fundamentals and snug feedstock availability were some of the reasons given by sources as the cause for the increase in polypropylene prices over June. Furthermore, some of the sources said that underlying demand remained modest, with end users reluctant to commit to large volumes. However the stock transfer from producers to converters was believed to carry through from the end of May to the beginning of June.
The rise in polypropylene spot prices from the beginning of June at Eur1202.5/mt FD NWE, to the end of June at Eur1207.5/mt FD NWE, was not believed by sources as being due to an improvement in end-user demand.
Despite the recent optimism cause by upbeat economic data, the European petrochemicals industry is cautious with regards to the outlook. Especially, when higher energy costs might have the exact opposite result or the still fragile European economies. By the same token, if positive economic data continue to support market sentiment, European consumer demand recovery should follow.
Source: Platts.com
