European and US polyolefin markets reflect global slowdown in manufacturing

07-Jun-11
Global manufacturing eased sharply in May to its lowest level since September 2010, according to the JPMorgan Global Manufacturing PMI. As per Reuters, data out of China suggests only a slowdown in growth there. However, data from USA raised deeper concerns about the pace of recovery there- The Institute for Supply Management's U.S. index of national factory activity fell to 53.5 -- the lowest since September 2009. New orders slowed and inventories were drawn down, with deliveries also slipping. However, prices paid by manufacturers eased last month. Pressures from rising commodity costs, plus supply-chain disruptions from Japan's natural disaster, and extreme weather domestically have combined to slow manufacturing's momentum. This is particularly worrying since manufacturing has been the economy's shining star. Additionally, US private payroll growth slowed sharply in May, falling to the lowest level in eight months. Spanish manufacturers contracted for the first time in eight months, while Italian and Irish factories saw a marked slowdown in growth. Supply-chain pressures dented the French and German PMIs, which had been hovering near all-time highs. British manufacturing PMI hit a 20-month low in May of 52.1 from 54.6 in April, blamed on a weaker domestic market -especially for consumer goods. In China, the official PMI touched a nine-month low, below economists' forecasts as new orders fell sharply. The global slowdown in manufacturing is being reflected in European and US polyolefin markets as anxiety in the industry grows over the prospects for the rest of this year, as per ICIS. June contract prices in Europe for ethylene and propylene have declined after 7 consecutive months of increases. Ethylene contracts have slipped by Euro 45/ton and C3s by Euro 40/ton, according to ICIS pricing. Polyethylene (PE) pricing has already started to fall, led by too-expensive low density PE (LDPE). Polypropylene (PP) appears to be in better shape because of the structural shortage of propylene, but pressure is building for reductions in the cost of the resin. The continent's polyolefin makers and buyers will do their best to claw-back margins as long as the current climate continues. This follows a long period of excellent profitability at the cracker end of the business on tight supply of ethylene and strong co-product credits. In the US, polyethylene (PE) contract prices were rolled over from April into May as producers backed away from attempts to push through a 5 cents/lb increase, again according to our colleagues at ICIS pricing. This was despite yet more production problems upstream that have resulted in an increase in ethylene costs. Prices in China have been flat or on the decline since the end of the Chinese New Year (CNY) holidays in February, as we have discussed many times on this blog. China had already been damaged by inflation, credit tightening and possibly the worst electricity shortages since 2004. China's PE imports slipped by 16% in Q1-2011 over Q1-2010 to 1.18 mln tons, according to Reuters, which quoted the China Petroleum and Chemical Industry Federation. Implied consumption fell by 1.5% following increases of 7-10% during the first quarters of 2009 and 2010. The Indian market is also weak as the government again battles inflation.
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