EPCA ’08: Supply and demand key for olefins chain

27 September 2008 11:00  [Source: ICIS news]

By Nel Weddle and Linda Naylor

Supply and demand key to Europe olefins chainLONDON (ICIS news)--Supply and demand expectations are likely to be key issues for players in the olefins and polyolefins markets heading to the annual European Petrochemical Association (EPCA) conference in Monaco this weekend.

Many are pessimistic and do not expect demand to be in any way buoyant moving through the fourth quarter and into 2009.

To exacerbate the situation, sources are eyeing new Middle East capacities warily.

“We will try to discuss longer term stuff, now that the Q4 [ethylene] contracts are out of the way,” one supplier said

“The senior guys are in and so they like to talk of longer term strategies with business partners, check overall relationships.”

The European olefins contract mechanism will again also be a point of discussion.

Unprecedented upstream volatility and negative cracker margins have led to further calls for a change to the way contracts are settled.

In July, the INEOS group officially announced its intention to move to a more responsive monthly contract system from 1 October.

But other companies’ positions have not been totally clear.

Currently, most ethylene (C2) and propylene (C3) is contracted on a quarterly basis, although some ethylene volume is based on a bimonthly contract. It is by no means certain that the industry will manage to adapt to new mechanisms.

This year has so far been a rollercoaster for both ethylene and propylene.

Cracker reliability has been good and the shutdown slate lesser than in previous years, but market dynamics have forced cutbacks in operating rates.

First, in the second quarter, when cracker margins turned negative for the first time since 2002 on peak crude and naphtha values. And for a second time towards the end of the third quarter, because of ethylene containment issues.

In the first half of the year, propylene was long and producers were forced to switch to alternative feedstocks and tweak running severity in order to better tailor output to demand. Ethylene was healthy, demand strong.

Both markets balanced out mid year following record high increases for third quarter contracts. Contract discussions were protracted and settlements agreed only after the quarter had begun. These highlighted an industry environment made difficult by unfeasibly high feedstocks and concerns about downstream demand.

Concerns began to heighten in the second half of the year as demand failed to emerge as expected following the European summer break.

Demand into the key ethylene derivative polyethylene was particularly bad. Industry observers were unable to determine what proportion of the downturn in demand was pricing speculation and what was the result of the weak economy.

Demand for propylene, by comparison, was steadier

Downstream from the olefins it is becoming increasingly clear that polyethylene (PE) volumes have slumped in 2008.

Some players estimated a drop of as much as 7% in year-to-date volumes over 2007, sources said on Friday.

The slump has led to a significant price drop in price levels in September, with lower indications already circulating for October.

Spot low density PE (LDPE) had dropped from highs of €1,500/tonne ($2,206/tonne) FD (free delivered) NWE (northwest Europe) in July, to their current level in the low-to-mid €1,200s/tonne FD NWE.

Prices seem to be falling by the day,” said one LDPE buyer. “I have got a decrease of €80/tonne in September and my producer has already offered me minus €100/tonne for October.”

August saw the biggest fall-off in volumes, as sellers stood on the sidelines, watching oil slide from its July high of $147/bbl to well below $100/bbl.

Asian prices also fell dramatically in the week to Friday 26 September, showing their biggest drop for ten years.

September PE volumes in Europe showed some improvement over August, and producers had expected demand to return as soon as fourth quarter ethylene contracts settled but they were disappointed.

“We were expecting a strong October,” said a major producer, “but it’s just not happening.”

Another major producer, however, expected demand to improve. “We are seeing an over-reaction to an over-stressed situation,” he said.

The consensus of opinion, however, was that the fourth quarter would be hard.

($1 = €0.68)

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For more on the major olefins and aromatics, visit ICIS Chemical Intelligence

By: Nel Weddle
+44 20 8652 3214

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