06 June 2008 11:57 [Source: ICIS news]
LONDON (ICIS news)--European ethylene (C2) and propylene (C3) players were gearing up for third-quarter contract discussions which were expected to get underway in the next couple of weeks, buyers and sellers said on Friday.
While the direction for ethylene was clear given the well-balanced supply and demand nature of the market over the last two to three months and not least the record strengths in upstream crude and naphtha costs, the outcome for propylene was not so straightforward.
Last week’s settlement of the first June-July ethylene bi-monthly contract at €1,105/tonne ($1,726/tonne) FD (free delivered) NWE (northwest Europe), marking an increase of €75/tonne over April-May, was largely deemed a good indicator of what was to come, whether market participates agreed with the system or not.
However, while one quarterly based consumer said that it felt the €1,105/tonne FD was a “reasonable number” given the recent highs on crude and naphtha, at least one other large consumer thought otherwise.
“We cannot pay that much or we are dead. We will have to cutback [derivatives] dramatically”, the source said.
Initial talk from some sellers was that €1,105/tonne was not likely to be enough.
“We should have something significantly higher than €1,100/tonne,” said one major producer.
The US dollar versus euro exchange rate was relatively stable sources said but the crude and naphtha markets were extremely volatile. This was leading to some uncertainty over when a settlement could be achieved.
“I don’t have a right feeling to go ahead and announce our position,” a source said.
Contract negotiations were likely to be much tougher for third-quarter propylene, with buyers’ and sellers’ positions still poles apart.
Buyers were adamant that they should have some recompense for what they saw as overvalued contract numbers in the first and second quarters. Propylene supply was still lengthy albeit improved from early May when producers had to resort to exporting surplus at very low prices and spot values had remained consistently below net contract.
The advent of $1,000/tonne plus (€640/tonne) naphtha did see some buyers revise their contract expectations. Prior to the gains, one buyer said that it would seek a “three-digit decrease” from the current contract level of €927/tonne FD NWE, although some other sources declared this to be unrealistic.
A couple of current buy expectations appeared to be residing in the region of minus €50/tonne.
Propylene sellers appeared to dismiss any influence that spot pricing might have on contract values.
“Spot volume is minor compared to contract volume,” said one producer.
No sellers were willing to outline any specific numbers at this stage.
Some observers pointed out that a drop in the propylene price could mean a higher price for ethylene in order to mitigate the impact on cracker margins. Some producers had earlier suggested that cracker cutbacks could be more extensive should contract prices not accurately reflect cost expectations.
The unprecedented volatility in the crude and naphtha markets had also led to some renewed calls for the olefins industry to move to a monthly contract system which would allow for the swings in feedstock. Cracker operators argued that margins had taken a big hit this year and that the quarterly system was unsustainable in the current climate.
At least one monthly ethylene agreement between two integrated producers was known to be in existence but the price is kept private and confidential.
($1 = €0.64)
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