OUTLOOK '08: Costs key in Europe olefins

27 December 2007 10:49  [Source: ICIS news]

By Ed Cox

LONDON (ICIS news)--Record high first-quarter European ethylene (C2) and propylene (C3) settlements have not offset cracker operators’ fears for 2008 margins because of unprecedented upstream energy pressure.

Despite first-quarter ethylene sitting at €1,023/tonne FD (free delivered) NWE (northwest Europe), up €78/tonne, sellers are already worried over thin margins with naphtha firm and a strengthening US dollar.

With the 2008 cracker maintenance slate easier than 2007, consumers reason that supply should be less of an issue but the real headache for the market will again stem from fears that energy will remain volatile and expensive.

No-one is confident enough to make a firm prediction on where naphtha and crude oil pricing will go.

Only facts speak for themselves: 2007 saw Brent crude close to $100/bbl, with naphtha price ideas breaching $850/tonne CIF (cost, insurance and freight) NWE, both record levels.

Naphtha prices have doubled in just over two years.

"We did our calculations and we needed plus €130/tonne on first-quarter ethylene to reach mid-cycle margin levels. Yes we are back in the black after seeing red numbers in December but margins are narrow,’ said one cracker operator.

Finding compromise prices which satisfy both cracker margins and concerns over derivative markets will surely be difficult again.

"I accept buyers have good arguments about their own cost pressures," commented another producer.

"But if our margins are too low we will have to cease production. The fourth quarter was catastrophic. We cannot compromise on prices, and it’s up to consumers to do their job separately."

Producers remain confident over signs of good nominated contract demand, not expecting any great improvement in supply.

2007 saw potentially more than 500,000 tonnes/year of extra ethylene brought on line in Europe, accompanied by significant delays involving BASF and BPRP. Now buyers are optimistic that this will affect supply over the coming 12 months.

Suppliers point to increases in derivative capacity, such as work due to lift BASF’s ethylene oxide production and SABIC’s new low density polyethylene (PE) plant in the UK and high density PE (HDPE) in Germany.

Any increase in domestic supply would not change the ethylene balance greatly, said one producer, rather it would limit opportunities for imports from the Middle East, which has looked more actively to Europe during tight periods this year.

Furthermore, volatile cracker performance would mean a balanced market rather than any oversupply, added the source.

Buyers, however, will judge the situation differently given the widening gap between European and Asian ethylene prices and with one confirming it would look to take advantage of any arbitrage options.

First-quarter one ethylene at €1,023/tonne equates to $1,483/tonne, compared with mid-December SE Asian spot at $1,170-1,225/tonne CFR (cost and freight).

A real concern is the cost advantage that cheaper ethylene gives derivative manufacturers in Asia, which could attract cheaper imports to Europe.

Much will depend on the ability of polymer markets to absorb the record high olefins prices.

The outlook for the first half of 2008 is good, with both PE and polypropylene (PP) markets expected to perform well.

However, the increase in Middle East and Indian polymer capacity is eventually expected to have a clear effect in Europe.

"If naphtha prices stay around $820/tonne CIF NWE in the first quarter, then polymer markets should enjoy greater margins than cracker operators,’ said one olefins consumer.

Sellers have bemoaned the lack of cracker margins in November and negative cost position in December, while working with very good nominated contract volume for the first quarter.

General economic fears will persist, especially over the health of the US economy and Chinese inflation, although estimates suggest the eurozone will remain resilient and show GDP growth in the region of 2%.

The nature of contract systems is always a topic, with questions persisting over what form the bi-monthly ethylene settlement will take.

One of the three producers involved pulled out in 2007, with a large consumer following. This left two producers and four consumers, one of which joined late in the year.

Whether praised or criticised, there was no doubt that the December-January settlement up €65/tonne was an often quoted number in the context of first-quarter discussions.

In terms of relative pricing, the gap between ethylene and propylene could widen further, with sellers more optimistic on C2 demand than C3.

The loss of PP capacity in Europe in 2007 certainly contributed to easier C3 availability later in the year with the first-quarter contract gap already at €78/tonne after propylene moved up €57/tonne to €945/tonne FD NWE.

Reported 2008 European cracker shutdowns

Operator		Location	Volume (tonnes C2)	Shutdown period
ExxonMobil		Fawley 2, UK	115,000	February*
Dow		Terneuzen 2, Netherlands	575,000	March-April
SABIC		Wilton 6, UK	865,000	May-June
PKN		Plock 2, Poland	700,000	June-July*
Polimeri Europa		Priolo, Italy	745,000	September-October
Repsol		Tarragona, Spain	660,000	Q4
Basell		Munchmunster, Germany	340,000	October-November

* unconfirmed

($1 = €0.69)

By: Edward Cox
+44 20 8652 3214

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