Ethylene Contract Settlement Stalled

03 August 1998 00:00  [Source: ICB Americas]

By Janet Link

US ethylene producers and consumers, continuing their struggle to protect dwindling margins, are again stuck in unusually protracted contract negotiations. As late as July 29, market participants confirmed that the June ethylene contract was not yet settled, and most say there is little sign of an imminent settlement. Producers are proposing a price decrease of 0.5 cents per pound for June, but buyers are holding out for a 0.75 cent decrease, following a 0.75 cent decline in May (CMR, 6/15/98, pg. 1).

The prolonged negotiations over 0.25 cents per pound, in some market participantsÕ opinions, reflect the severity of the squeeze hammering producers throughout the ethylene chain.

ÒI have never seen a situation in which no one would give on 0.25 cents per pound for this duration of time,Ó notes an olefins producer.

Ethylene spot pricing has eroded steadily in the past few months, and buyers cite the wide gap between spot and contract as a reflection of oversupply throughout the ethylene market. The gap between spot and contract pricing, which is usually around 2 cents per pound, has been much wider in recent months.

In May, spot ethylene was around 14 cents per pound in the US Gulf. By late July, the spot market was closer to 12 cents. Net ethylene contract transaction pricing was around 18.25 cents per pound in May. A 0.75-cent-per-pound drop in that price for June would still leave the spread between spot and contract at more than 5 cents per pound.

Cash margins for producing ethylene have declined since the start of the year. According to Mark Eramo, director for light olefins at CMAI, a consultancy in Houston, average cash margins for making ethylene (based on a weighted average net ethylene contract transaction price and cash costs) were 11.5 cents per pound at the beginning of the year, versus about 8 cents per pound in June.

CMAI expects those margins to fall to 5 cents per pound in the fourth quarter. That level, they say, would likely represent the bottom of the ethylene price decline, as it has historically.

Producers of ethylene derivatives, particularly non-integrated manufacturers, are facing a similar erosion in their margins, hence their push for the largest ethylene price decreases possible.

Producers and analysts point to the vinyls chain as the segment of the ethylene market that has been the weakest for the longest period of time, although prices for polyethylene, vinyl acetate monomer and ethylene glycol have also eroded.

One VCM producer estimates that the global industry is operating in a range of 80 to 87 percent of capacity, following capacity expansions in 1996 and 1997. ÒConsidering full costs, no one in the VCM industry is making money at this point,Ó he says.

In response to the weak market, US ethylene producers, like many derivative producers, have begun to cut back production. CMAI estimates that the US ethylene industry ran at 100 percent rates in the first quarter, but has since cut overall operating rates to less than 95 percent to prevent a major inventory buildup.

Despite some production cutbacks, analysts still expect ethylene stocks to be higher at the end of the second quarter than they were at the end of the first.

BTXÑSpot trade remained thin in the US Gulf early last week, and most traders expect it to stay that way at least until August benzene and xylene contracts are settled. Lower gasoline prices are adding downward pressure to BTX.

Contract pricing for both benzene and toluene is under downward pressure because spot material has been selling consistently below July contract levels.

Early last week, spot benzene was talked at 73c. to 73.5c. per gallon for August material. Other months were higher, with September talked closer to 74c. and October around 75.5c. per gallon.

Spot toluene was offered around the middle of last week at 65c. per gallon for August. Business was done early week at 64c. per gallon. Xylenes were offered at 65c. in mid-week, with no bids seen.

BUTADIENEÑA producer has informed customers that it is lowering its butadiene contract price by 1c. per pound to 16c. per pound, effective August 1, but no other price decreases have yet been reported.

Analysts see the US butadiene market as fairly well balanced. Butadiene stocks dropped in June as Huntsman and Equistar took turnarounds, and Shell Chemical operated at reduced rates.

ShellÕs Norco plant came down for about two weeks of unplanned maintenance in July, but was in the process of resuming operation last week, according to the company.

Analysts say butadiene demand may have been hurt in July by the General Motors strike. Demand for styrene-butadiene rubber is weak, though demand in other markets, such as polybutadiene, is healthy. Producers estimate butadieneÕs spot price at 14c. to 14.5c. per pound.

CUMENEÑContract pricing for July rolled over at the June level of 14.75c. per pound. August contracts remain unsettled and will likely reflect the August settlement for benzene contracts.

METHANOLÑSpot pricing was higher in late July than in June. Early last week a producer pegged the spot market at 27c. to 27.5c. per gallon, up from 24.5c. to 25c. in late June. The higher prices may reflect an increase in July natural gas prices.

July methanol contracts are not fully settled. Producers rate most June business to large volume customers in a range of 30c. to 33c. per gallon.

MTBEÑSpot material was offered at lower prices in the US Gulf last week. Traders attribute this to softer spot gasoline prices. Offers were reported below 64c. per gallon.

PHENOLÑDomestic phenol demand is strong, and a producer describes the market as Òfairly well balanced at present.Ó Phenol pricing is stable at 41c. per pound, but new capacity will come on next year, adding supply.

PROPYLENEÑJuly propylene contracts are not yet settled, but most sources agree that June contracts are down 0.25c. per pound for chemical and polymer grades. One major buyer, however, said early last week that it has still not settled for June.

The June price decrease puts polymer-grade postings at 14c. per pound and chemical-grade postings at 12.5c. per pound. Net transaction pricing is slightly lower, and a producer estimates that spot chemical-grade is around 10c. per poundÑ1.5c. to 1.75c. below the net transaction price.

Propylene supplies are more than adequate to meet demand. Formosa Chemical is starting up its propylene splitter at Point Comfort, Tex., and Diamond Shamrock is set to start up its splitter next month.

Pricing for refinery-grade propylene settled around 8.5c. to 9c. per pound in July. Alkylation values declined in late July because of weak gasoline prices. The alkylation value was 8.5c. per pound last week.

Some analysts say the drop in alkylation values may encourage refiners to push more propylene into the spot market. Others say this will depend on the magnitude and duration of the decrease in alkylation values.

STYRENEÑSpot styrene trade remained light on the US Gulf Coast last week. Business was done in mid-month at 17.25c. per pound, but no other spot business was confirmed last week.

Arco ChemicalÕs Channelview, Tex., ethylbenzene plant came back from a maintenance turnaround last week, but is not yet running at full rates. The PO/SM plant at Channelview is now running close to full rates.

VCMÑPrices continue to deteriorate in the VCM market because of weak export demand and depressed prices for ethylene, chlorine and PVC. June pricing settled recently at 15.5c. per pound, down 0.5c. per pound from May. It is too early for a July settlement, but analysts see continued downward pressure.

Spot export pricing also continues to soften, reflecting oversupply in the international market. According to one producer, spot VCM was recently exported at $195 per metric ton, f.o.b. US Gulf.

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