17 June 2008 12:08 [Source: ICIS news]
By Nel Weddle
LONDON (ICIS news)--European variable cracker contract margins using naphtha feed have turned negative for the first time since September 2005 and this month looked set to drop to the lowest level in a decade, according to ICIS pricing analysis on Tuesday.
In the week ending 13 June, contract margins eroded by around €30/tonne ($47/tonne) and moved into negative territory as a result of the stronger US dollar, which was up 2.3% against the euro, and relatively lower co-product values.
On this basis many naphtha cracker operators would not be contributing to their fixed cash costs and would not be able to sustain operations at this level for an extended period.
European cracker operators had been tweaking operating rates and adjusting feedstock slate where possible for some time but producers only started to talk about rate cutbacks as crude and naphtha prices soared above $135/bbl and $1,000/tonne respectively.
However, few were prepared to openly confirm such a move.
Spot margins on the other hand moved into positive territory, improving around €50/tonne as a couple of unplanned cracker outages supported price increases.
Spot levels were currently being assessed in the mid €1,100s/tonne FD (free delivered) northwest Europe (NWE) by global chemical market intelligence service ICIS pricing. Spot margins turned negative in mid-May and reached the bottom a couple of weeks ago.
Liquid petroleum gas (LPG) margins were showing a strong advantage for crackers with the flexibility to use this feedstock. However the advantage against naphtha fell by $75/tonne as a result of a big jump in LPG prices.
Some sources said they would be surprised if no European cracker operator had not already dusted off any projects to upgrade or improve on its current cracker feedstock capability. Up until this year, there had been little incentive for producers to do so.
Poor margins would be the main feature of the upcoming negotiations for third quarter contracts, producers said.
Strong increases were already being mooted for ethylene. One producer said that the increase “would have to be above €100/tonne” while others were talking numbers significantly higher. The alternative was to reduce cracker rates more dramatically.
Propylene remained the olefin more difficult to call. Some consumers still said a decrease was justifiable as they viewed the propylene market as structurally long with poorer than anticipated derivative performance. However, producers were clearly focusing on an increase, although at this stage it was not evident of what magnitude.
"The Q3 price increase will be critical” said a source.
Second quarter contracts were settled at €1,038/tonne and €927/tonne FD NWE for ethylene and propylene respectively.
ICIS analysis measures cracker margins over raw material costs, co-product sales and key variable manufacturing costs.
Paul Ray contributed to this article
The weekly margin report for polyethylene (PE) in ?xml:namespace>
For more information on olefins visit ICIS chemical intelligence
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