20 March 1995 00:00 [Source: ICB]
The downfall of the methanol giants is a cautionary example to olefins suppliers tempted to push blindly for successive price hikes. However, the reality of global market forces is also guiding players towards caution.
By Keyvan Hedvat
OLEFINS PRODUCERS would do well to learn a lesson from the methanol market.
The world's methanol supplying giants took full advantage of rising downstream demand and supply curtailments to push through successive price hikes, taking quarterly European contract prices from DM230/tonne fob Rotterdam in Q4 1993 to DM815/tonne fob this quarter, a 254% rise in just 15 months.
Now, after another disappointing winter oxygenated fuel season coinciding with an opt-out ridden reformulated gasoline regime, MTBE prices in the US - followed by Europe and the Far East - have declined just as methanol was rising to the point where feedstock was being priced higher than derivative.
This is proving so embarrassing to methanol suppliers that some of them were already by early March floating Q2 contract numbers below DM500/tonne, a greater decline than any of the earlier quarterly gains. Further reversals are on the horizon.
Olefins and polyolefins markets are far too regulated by long-term, stable contractual relationships, involve too many integrated cracker-to-polymer players, and see polymer producers in too strong a position vis-a-vis their numerous customers to allow such a disastrous price crossover to occur.
But plastics converters are angry about the pace of polymer price hikes - especially in PE -and, more importantly, the strength of the huge non-integrated German olefins buyers has sent a message of thus far and no further to their suppliers' pricing ambitions.
The message has been received loud and clear with the likely result that quarterly pricing changes in western Europe this year are likely to be limited, and based on a greater desire to reach mutually acceptable agreements.
Some producers accept there may be no change in Q2 contracts for ethylene given that the product is now universally described as broadly balanced and that few maintenance shutdowns are planned before late summer/autumn.
Only OMV subsidiary PCD's 345 000 tonne/year cracker at Schwechat, Austria, and some downstream units, as well as the Litvinov cracker in the Czech Republic, are expected to see turnarounds as early as Q2.
Shell has meanwhile plumped for just a two-week shutdown in June for compressor repairs at the 625 000 tonne/year Moerdijk cracker in the Netherlands, although its next major turnaround at the unit is scheduled for 1999.
Propylene is certainly displaying more signs of persistent tightness than ethylene, although much of this is based on a PP price strength, the limits of which may soon be tested as intra-polymer marginal price competition starts to come into play.
Many players have been predicting modest hikes in Q2 propylene contracts in a combined package with ethylene roll-over, with some saying a combined package might yet involve a slight rise in both ethylene and propylene from DM930/tonne and DM835/tonne FD respectively to DM950/tonne and DM850/tonne.
Those who plump for this kind of scenario put forward the argument that ethylene and propylene markets will be kept tight throughout the year for the simple reason that maintenance shutdowns are concentrated in the US during H1 and western Europe during H2.
The disaster at Exxon's Baton Rouge. Louisiana, cracker last summer pushed back the shutdown of its Baytown, Texas, cracker for 204 000 tonne/year debottlenecking to 1.16m tonne, from last autumn to ten weeks starting 13 January of this year.
March was to see a series of rotating shutdowns affecting one after another of Phillips' six furnaces at one of its larger 680 000 tonne/year crackers in Sweeney, Texas, with Union Carbide also set to start a turnaround at its largest 635 000 tonne/year cracker at Texas City, Texas, in March.
These shutdowns were scheduled to be followed in April/May by turnarounds at Occidental's 498 000 tonne/year Chocolate Bayou, Texas, cracker, and by Rexene at its 235 000 tonne/year plant in Odessa, Texas.
Late Q1/Q2 were also to see shutdowns at DuPont's 544 000 tonne/year Orange, Texas, and Shell's massive 862 000 tonne/year cracker at Deer Park, Texas.
The Far East, especially Korean shutdowns, will also hit the market during March/Q2. Honam, Daelim, KPIC, Samsung and Yukong all have 30-40 day cracker shutdowns amounting to 1.65m tonne/year rated capacity in that period.
CPC's turnaround at its smallest 230 000 tonne/year Kaohsiung cracker was effected for the 35 days from February, with the remaining 1995 shutdowns in the Asia-Pacific spread fairly evenly over the July to November period.
Some major propylene sellers, however, draw a clear distinction between propylene and ethylene fortunes. At the start of March, well ahead of the opening of Q2 negotiations, one player was preparing to push for a DM50/tonne hike to DM900/tonne, a deal that would leave ethylene unchanged.
Aside from the US/Far East cracker shutdowns, and the few European ones, two major German chemical-grade refinery propylene facilities will be down for extended maintenance during Q2: the 240 000 tonne/year OMW Karlsruhe unit from end-April until 20-25 May and the 90 000 tonne/year PCK plant in Schwedt, eastern Germany, for four to five weeks in April/May.
It was also being reported in late February that many fluid catalytic crackers (FCCs) were not producing as much refinery-grade propylene as had been expected.
Exxon had reportedly gone so far as bringing forward a planned shutdown at its 110 000 tonne/year chemical-grade unit in Fawley, UK, just as its 100 000 tonne/year Augusta unit in Italy was being closed for maintenance.
|European cracker/FCC maintenance shutdowns, 1995|
|Carling||210 000||Late Aug/early Oct|
|Atochem||Gonfreville||470 000||10 Oct/20 Nov|
|Erdolchemie||Dormagen||360 000||End Aug/early Oct|
|Dow||Tarragona||465 000||25 Sept/13 Oct|
|Enichem||Gela||Q3 (four weeks)|
|PCD||Schwechat||345 000||19 Apr/26 May|
|BASF||Ludwigshafen||400 000||Aug/Sept (six weeks)|
Major refinery propylene turnarounds:
|end Apr/20-25 May|
|Apr/May (4-5 weeks)|
* Two week shutdown for repairs on compressor.
DSM and Borealis have both delayed their originally scheduled 1995 turnarounds at Beek, the Netherlands, and Sines, Portugal, until early next year, the former to coincide with work on a new pygas-to-styrene unit and the latter to gain sufficient time to prepare for equipment modifications on the Sines cracker.
BP was meanwhile planning for a three-week shutdown of its 30 000 tonne/year polymer-grade unit in Grangemouth and a two-week shutdown at its 100 000 tonne/year Nerefco unit in Rotterdam, both in March.
With surplus Iranian, Saudi and Libyan material being increasingly attracted to the Far East by late Feb/early March, and US propylene contract prices seeing no halt until March to their upward movement, there may seem to be little room for easing west European balances. Numerous unknowns come into the picture, however.
For one thing, the European market is awaiting the clearing out of Dow's 80 000 tonne/year capacity propylene storage caverns at Stade, Germany, to make way for an inspection by environmental authorities. But Dow, which has recently been in regular need for spot volumes, denies the inspection/clear-out is already set for Q2, although it will take place this year. And it says the clear-out, which would actually involve around 10 000 tonne of stored propylene, may force it to buy material in spot markets at short notice, thus aiding short-term tightness.
More uncertainty surrounds Pemex, which was to start up its 350 000 tonne/year propane dehydrogenation plant by early Q1 1995, but had yet to do so earlier this month.
This addition will wipe out Mexico's propylene deficit, forcing US and Latin American surpluses onto other export markets. Freight rates may, however, continue to be prohibitively high for these surpluses to be shipped into Europe.
The Far East contains a whole bundle of uncertainties centering on project startups. BP was scheduled to start up its 180 000 tonne/year FCC propylene unit in Indonesia by April/May head of October completion for a 100 000 tonne/year PP plant that will feed on the FCC. But dredging work at the site is reported to have been so slow that the propylene unit may not be completed before startup of the PP plant.
The actual operation of the new 550 000 tonne/year Chandra Asri cracker at Cilacap, Indonesia, which was started up in early Q1, the scheduled cracker shutdown-for-expansion at Mab Ta Phut, Thailand, from 1 June until 20 August, and the planned summer startup in Saudi Arabia of Sabic's propylene-consuming 2-ethylhexanol plant - which will take considerable propylene volumes off the Far East route - will all play a part in market developments mid-year onwards. Much will depend on startup schedules being met for these and several other Far Eastern polymer projects.
One further complication could immediately enter the European Q2 contract equation, with perhaps the greatest direct impact on ethylene - the collapse in the dollar's value against the deutschmark (not to mention the yen). The early March slump took the dollar's value 13% down against the deutschmark at $1:DM1.37 on 8 March against $1:DM1.57 in late December/January.
One major producer accepted that if those kinds of levels were maintained through the second half March negotiating period for Q2 contracts, it would become very hard to argue for anything beyond roll-over, whatever the arguments favouring market tightness. The arguments for roll-over were gaining momentum by mid-March.
As for Q3, the European cracker shutdowns (see table) will take out significant volumes of capacity, but will do so during the weakest demand quarter of the year and, if things go according to plan, following the completion of restarts, debottlenecks and fresh plant additions in the US and Asia-Pacific.
If the dollar stays at very weak levels, west European producers will face stronger competitive pressures from US exporters in their own markets and from Far East players in that region. Freight costs and domestic demand conditions in the US and Far East may hinder or aid these trends.
Virtually every major consultancy has, however, predicted US ethylene and propylene prices to decline during H2, implying much improved netbacks for US exporters and pressure on west European contract numbers certainly by post-turnaround Q4.
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