FocusEurope cracker operators bemoan margins

19 July 2007 17:28  [Source: ICIS news]

By Edward Cox

LONDON (ICIS news)--European cracker operators are facing narrowing margins against upstream naphtha costs in the third quarter and feel they have missed out compared with healthy downstream derivative margins, they said on Thursday.

So far in July, the price gap between spot naphtha and the third-quarter ethylene (C2) contact has been around €416/tonne ($594/tonne) compared with €494/tonne in the fourth quarter of 2006 and €431/tonne in the first quarter this year, according to data from global chemical market intelligence service ICIS pricing.

A basic analysis of the ethylene/naphtha price spread does not tell the whole story on margins. The effect of higher naphtha costs has partly been offset by a weaker US dollar, but producers say that they were frustrated by the €35/tonne third-quarter ethylene increase. Some feel it did not match higher upstream costs or downstream profitability.

One cracker operator said that, given market fundamentals, cracker profitability should be at the top of the cycle, but this was not the case.

"The whole chain would have benefited from a higher third-quarter contract price, now we may have to live with poor margins for six months as fourth-quarter negotiations will not be easy when markets are not so strong.

"The derivatives needed the monomer increase to get prices up before the likely decline later in the year," the source added.

Given the predicted downturn in the olefins and polyolefins markets around 2009/2010, caused in part by new Asian and Middle East capacity coming on line, European producers are aware they need to make the most of the current situation.

Apart from the occasional unplanned cracker hiccup, European-wide operating rates were reported to be high, which sellers stress is a sign of how well derivative markets are doing.

The combination of these factors justified an increase in the upcoming August-September bi-monthly ethylene settlement, said one seller on Thursday.

Consumers, unsurprisingly, offered a less sympathetic view on the plight of the supplier.

"I do not look to the past, I only look to the future. Just because cracker operators had healthy margins in the past does not give them the right to keep them in the future," a major buyer said.

The consumer added that it was discussing more business from the Middle East, and noted healthy availability from the region, and at a better price compared with US imports.

The graph below shows that derivative low density polyethylene (LDPE) sellers are enjoying a comparatively fair margin against the current ethylene contract price. PE sellers are achieving hikes of around €30/tonne in July, with more bullish targets already noted for August.

PE is the key downstream application from ethylene, accounting for about 60% of global demand.

Ethylene oxide (EO) is the second largest application from ethylene, taking around 13% of global ethylene. The bulk of EO is used to produce monoethylene glycol (MEG), which has clearly fared less well than its larger PE counterpart.

The cost environment remains fierce, with September Brent crude prices hovering above $77/bbl on Thursday afternoon.

It is clear European cracker operators will continue to have an arduous task passing their cost pressures on downstream.

($1 = €0.73)

By: Edward Cox
+44 20 8652 3214

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