Europe cracker operators brace for $1,000 naphtha

20 May 2008 11:27  [Source: ICIS news]

By Nel Weddle

LONDON (ICIS news)--European cracker operators were bracing themselves for a big hit on margins as naphtha neared $1,000/tonne (€640/tonne) with some mulling operating rate cutbacks and third quarter price rises, industry sources said on Tuesday.

The relentless upswing on Brent crude and naphtha - currently at around $124/bbl and $996-998/tonne respectively - over recent months was only being partially offset by a weak US dollar and strengthening cracker co-product prices.

ICIS analysis which measures cracker margins over raw material costs, co-product sales and key variable manufacturing costs showed margins for incremental tonnes to be at just €35/tonne in the week ending 16 May while contract margins were still faring better at €143/tonne ethylene.

“We just produce what we are obliged to produce,” said one cracker operator.

Another said that it was closely tailoring output to match demand.

The question over whether cracker margins had led to any cutbacks in operating rates had been on sources’ minds for several weeks.

Despite admitting that margins for the average naphtha cracker were indeed being squeezed heavily, no producer was able to confirm any reductions for economic reasons, although some players reported a lengthy and reportedly still ongoing shutdown at a small cracker in the Benelux region.

Producers said that they were evaluating the crackers on a daily basis - pushing feedstock slate flexibility and tweaking severity in an effort to maximise margins.

Some said that it was too late to cut back at the cracker level as second-quarter commitments had to be fulfilled.

Rate cutbacks, however, could be an option in the third quarter if upstream pressure remained - it was clear that the potential to reduce volumes would be used as leverage in the upcoming third-quarter contract price talks.

“Initial talks have taken place but nothing in detail," an operator said. “Some customers are already expecting prices to be up, and June demand to be better due to a pre-buying effect.”

Despite the margin squeeze, contract margins were still higher than the average contract cracker margin of around €119/tonne seen in December 2007, when feedstock costs had increased, the US dollar was still relatively strong against the euro and higher first-quarter contract prices had yet to kick in.

Paul Ray contributed to this article
The weekly margin report for polyethylene (PE) Europe includes ethylene margins. It examines margins across the business chain from naphtha to PE. For a free trial and more information email paul.ray@icis.com
For more information on olefins visit ICIS chemical intelligence
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By: Nel Weddle
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