LAO Prices Surge in Europe Signals Economic Concerns Amid Rising Inflation and Energy Costs
- 31-Aug-2023 10:29 AM
- Journalist: Harold Finch
Linear Alpha Olefins (LAO) prices have started showing increments in the month of August 2023 in Europe. For the past three months, the prices have declined due to lower demand, European recessionary pressures, and global economic slowdown. The declining prices of LAOs allowed manufacturers like INEOS to reduce their operating margins until the break-even point to ensure the demand is met. In this context, the current rise in the prices of LAOs makes a serious case for the economic situation in Europe. LAO is obtained from the Steam cracking of Naphtha followed by oligomerization of Ethylene. LAO requires high inputs of energy as well as feedstock to obtain the desired proportions. ChemAnalyst inquiries with the manufacturers in Europe revealed that the 'inflated' inventories of feedstock were pushed in the market between January 2023 and March 2023, which pushed Europe into deep inflation as major downstream plastics, industrial solvents, and other fluids derived from LAOs generated multiplier effect in the monetary union of EU. This was followed by the rise in global crude oil prices due to OPEC+'s extension of production cuts by OPEC+, putting further inflationary pressures on Europe. To mitigate the problem, the European Central Bank unleashed a series of rate hikes beginning in October 2022, with the latest one in July 2023 pushing the cost of borrowing for both the fixed and working capital for the manufacturers.
In its Q2 2023 financial result, INEOS has highlighted the decline in demand and high input costs as the primary factors for such a moderate performance. Other LAO manufacturers have commented that the rising import LNG prices from the United States and Australia are also lowering the competitiveness of European LAOs in the global market. With European and North American economies facing high inflationary pressures, the Asian economies are facing lower export performance. Japan, India, South Korea, China, etc., are seeing a decline in exports to American and European markets. One market participant revealed that Europe-Asian trade decline has disproportionately affected the Asian markets than the European markets. Market Analysts assert that the EU's collective per capita income outstretches that of Asian giants like China by five times; thus, any decline in demand from the EU significantly affects the Chinese markets due to the differential in incomes of the two regions. This is observed in the downstream LAO products across Asian markets.
Market Analysts forecast that as LAO price keeps on improving, European manufacturing is expected to suffer significantly as the price rise is on the occasion of high input costs and not the rising demand. The rising energy and material costs push LAO manufacturers and the downstream value chain into a very uncompetitive market with American and Asian players where the price differential will differ by at least a factor of 2. American experts have asserted that the energy pricing in the US is half that in Europe, and as the American economy recovers, the dumping of American goods in European markets will push the recovery of the European Chemical sector to the latter half of 2024. The global dynamics will also be affected by the rising energy prices in Europe as Winter approaches. With high inflation and energy prices beginning from Q3 of 2023, Europe's LAO manufacturers and, downstream producers and consumers face a huge financial challenge. Top economists have commented that It is expected that the European Central Bank's policy decisions in the days to come will decide whether the global economic recovery begins in the first half of 2024 or the later phase.