INSIGHT: Record crude pressures chems further

23 May 2008 16:45  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Petrochemical makers are being pushed into a corner by sky-rocketing crude and feedstock costs.

Naphtha is not quite keeping pace with crude futures, which this week topped $135/barrel, but it has passed the almost unrecognisable $1,000/tonne mark in Europe and record high prices were also reached in Asia.

The only way is up for prices at the top of the petrochemicals chain but all producers are squeezed. There will be complaints all round that producers simply are not able to play catch up.

But is catch-up the name of the game?

We haven’t really been here before with feedstock and energy costs running rampant and the prospects of oversupply threatening demand growth.

As yet, there are no signs that new capacities in the Middle East are not being factored in gradually to world markets.

It makes no sense at this time of such great uncertainty to be deliberately setting out to force prices down. There are games to be played, certainly, but the most important is the struggle to hold on to margins.

Higher costs will be passed down particular product chains only to a lesser rather than to a greater extent in the current global economic environment.

The chemicals markets had been bracing themselves for cost increases but as ICIS news reported on Friday (May 23) few in Europe’s pivotal ethylene market were prepared for such a rapid increase in naphtha costs.

Ethylene in Europe is relatively tight so a possible cut-back in operating rates could be used to the producer’s advantage.

The same cannot be said for propylene, where demand is being hit by a slacker polypropylene market.

In that polymer, particularly, slower demand growth and the prospects of significantly increased supply are working to the customers’ favour. PP producers are trying hard to push product prices up.

There are distinct regional differences, however, with the China market bullish despite high propylene costs on still-strong domestic demand.

As the oil price continues to rise, producers are charting new ground. One UK-based financial analyst put it this way. “We are in a new universe. We’ve never been here before. I don’t know what is going to happen - no-one does.”

It has already been calculated that if European polyolefin margins suffer further, then the second quarter of 2008 could prove to be the worst since 2003.

Producers of some chemicals remain relatively sanguine as they maintain an ability to pass on higher costs, but there is a fear that if prices are pushed too high demand will suffer.

There is little incentive for customers to commit to higher prices in such a volatile crude environment in which prices could fall steeply. If crude gains further, of course, it is a different matter.

The producer’s dilemma is real and acute although not all products are affected in equal measure as ICIS reports have pointed out.

As the industry heads into what increasingly looks like a downturn, however, it is clear that some petrochemicals makers are going to suffer more than most.

If you are stuck in the middle in polyolefins, for example, the future does not look very bright. No wonder that major polyolefins makers like LyondellBasell and INEOS have sought greater upstream integration.

The integrated players are likely to be able to weather the impending storm better than most; although even for them times are likely to prove hard.

As analysts and others have suggested, the stand-alone petrochemicals maker is likely to be exposed. Some customers may be vulnerable also, if their suppliers prove unreliable.

The sector is already in a difficult period which could get a lot worse. The year is panning out as some expected with a relatively strong first quarter followed by a distinctly more difficult remainder of the year.

For more on olefins and polyolefins 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: Nigel Davis
+44 20 8652 3214

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