FocusRecord oil prices squeeze Europe chems

22 May 2008 15:25  [Source: ICIS news]

By Lucy Craymer

 

LONDON (ICIS news)--Rocketing oil prices are squeezing chemicals margins in Europe with market participants unable to predict how high crude would go, an analyst said on Thursday.

 

“We are in a new universe, we’ve never been here before,” Paul Satchill of ING said. “I don’t know what is going to happen - no-one does,” he added.

 

As prices were pushed up it was uncertain whether demand would remain and a lot would depend on whether emerging markets' needs could offset those in more developed ones, said Satchill.

 

Global chemical market intelligence service ICIS pricing's weekly margins report on polyethylene (PE) illustrates just how much they have been squeezed in some key areas.

 

“If market conditions were to remain unchanged then the second quarter of 2008 will see the weakest quarterly result since 2003,” the report said.

 

 

But market conditions in Europe are changing for the worse - prices for oil, gasoline, naphtha and the aromatics chain are breaking records on a near-daily basis.

 

European open spec naphtha prices have continued to surge on the back of record high crude, which has exceeded $135/bbl.

 

Based on the June crack spread, which was reported at -$12.80/bbl to -$12.60/bbl, open spec naphtha was assessed at $1,080-1,085/tonne cost, insurance and freight (CIF) northwest Europe (NWE).

 

Meanwhile, benchmark 10ppm (parts per million) premium unleaded gasoline barges reached another record high of $1,130/tonne (€712/tonne), with analysts saying this was directly linked to crude gains.

 

The aromatics chain was under pressure from all sides, according to market participants, as styrene plant outages sparked renewed buying interest and upstream drivers pushed spot prices to consecutive all time highs.  

 

A styrene deal was done at $1,620/tonne FOB (free on board) Rotterdam on Thursday, up $40/tonne on business done at record levels the previous day.

 

Upstream benzene, supported by energy complex gains and the upturn on styrene, traded at $1,355/tonne CIF ARA (Amsterdam Rotterdam Antwerp), while toluene was valued at $1,160-1,190/tonne FOB Rotterdam.

 

Industry sources along the chain from feedstock to end-use products expressed concerns that ongoing energy strength was driving pricing into unsustainable territory.  

 

Styrene monomer (SM) producers were buying material on the open market regularly over the past week. Traders said this was a fair indication of the economic viability of SM production.

 

"The cost of producing styrene is up significantly before we even consider ethylene, and benzene production is hurt by naphtha,” said one aromatics trader.

 

"It probably makes more sense to reduce rates and buy from the market right now than produce in any great volume."

 

This was only a short-term solution, however, said a source at a major producer. In the long term, high prices had the potential to cause downstream industry to reduce rates. 

 

“How will benzene behave - this is the question,” a large phenol/acetone producer said. “Benzene is increasing and the market is very nervous”.

 

Mixed xylene buyers said they were nervous to buy because they were unsure of which way crude prices would swing.

 

In olefins, Europe ethylene producers were under increasing pressure to increase third-quarter contract prices with some threatening reduced availability to recoup high naphtha costs, sources said.

 

Propylene is bucking the trend as the main derivative polypropylene (PP) is poor and this is weighing on the C3, which is seen as very long in Europe. Some producers have had to resort to exporting cargo at cheap prices in order to remove it.

 

Monoethylene glycol (MEG) producers were increasingly watching upstream oil pricing, fearing any impact this would have on third-quarter ethylene feedstock contracts.

 

They were keen to maintain prices, despite traders reporting lower spot deals because of deep-sea material due to arrive in June/July.

 

A source in the methylene chloride market said traders believed energy costs could have risen 25% by July and it was already a very costly process to produce chlorine.

 

The market was already under pressure to drop prices on the back of lower methanol costs in the second-quarter, the producer added.

European methyl ethyl ketone (MEK) and isopropanol (IPA) producers described the situation as unbearable as they struggled to deal with poor margins.

One MEK producer said it had not seen any compensation for the high feedstock costs in spot prices and it would consider reducing production rates if the situation failed to improve.

 

By contrast, methyl isobutyl ketone (MIBK) manufacturers have managed to recover some of the higher upstream costs, as MIBK spot has moved up on the back of market tightness.

 

($1 = €0.63)

 

Sarah Trinder, Linda Naylor, Nel Weddle, Heidi Finch, Peter Salisbury, Ed Cox, Kawai Wong, Julia Meehan and Fiona Bond contributed to this story

For more on these chemicals visit ICIS chemical intelligence 
Click here to find out more on the European polyethylene margin report
To discuss issues facing the chemical industry go to ICIS connect

 

By: Lucy Craymer
+44 20 8652 3214

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