FocusCracker operators to react to high costs

23 May 2008 12:47  [Source: ICIS news]

By Nel Weddle

 

LONDON (ICIS news)--The question of whether European cracker operators will start to cut back operating rates in the face of $135/bbl crude and naphtha well in excess of $1,000/tonne (€640/tonne), has never been more urgent, market sources said on Friday.

 

Olefins producers had earlier been bracing themselves for the worst, that naphtha would broach $1,000/tonne, but few expected assessed levels to have soared so rapidly to $1,080-1,085/tonne CIF (cost, insurance and freight) NWE (northwest Europe).

 

“No-one cracking is having fun with naphtha,” said one major European producer.

 

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 in negative territory, while contract-based margins were hovering just above zero.

 

There was a report that one global producer was planning to start to cut back rates at its European sites from next week but this could not be confirmed.

 

Companies had been trying to maximise margins for some time. They still had second-quarter contract commitments to fulfill and were not able to reduce rates to any significant extent.

 

Those with feed flexibility were faring the best, choosing to switch to cheaper, lighter alternatives such as liquefied petroleum gases (LPGs), while others tweaked running severity.

 

Another issue that cracker operators are facing is that not all the olefins are performing the same.

 

Ethylene (C2) was well-balanced in Europe, while propylene (C3) was viewed as very lengthy despite recent deals to export volume to Brazil, Asia and the USG in May.

 

Lighter feeds went some way to counteracting this as these favoured ethylene production over the higher olefins.

 

However, butadiene (BD) and the other C4 products which were already tight as a result of planned and unplanned production issues earlier in the year, had been further constrained at the cracker level.

 

“From my point of view, [we] may see some changes, reductions, [and] could see any [ethylene] shortfall absorbed by imports,” the producer said.

 

Although much would depend on what is achieved for third-quarter contract pricing. Upcoming contract discussions were increasingly on players’ minds.

 

There was no doubt producers would try to implement strong increases for ethylene and butadiene, sources from both the buying and selling sides said.

 

However propylene was more uncertain, given the widening disconnect between the upstream and downstream situations.

 

Propylene sellers were expected to push for an increase based on feedstock costs but said negotiations would be tough.

 

The consumers’ view was different.

 

“If people are willing to make less C3 then they should do so,” said one major consumer, adding some were exporting C3 in the low €700s/tonne, rather than reducing crackers, suggesting that this would be a bearish factor in the negotiations.

 

There would need to be “a lot of reductions” before it had any real impact on the supply length, some sources said.

 

Ethylene, propylene and butadiene second-quarter contracts settled at €1,038/tonne, €927/tonne and €980/tonne FD (free delivered) NWE respectively.

 

($1 = €0.64)

 

The weekly margin report for polyethylene (PE) in 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 

To discuss issues facing the chemical industry go to ICIS connect

 

By: Nel Weddle
+44 20 8652 3214

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