Buyers call for fresh Q4 on Europe cracker margins

17 October 2008 14:24  [Source: ICIS news]

By Nel Weddle

 

LONDON (ICIS news)--European contract cracker margins are threatening to breach €1,000/tonne ($1,351/tonne) as crude oil and naphtha values continue to sink, prompting calls from ethylene buyers on Friday for a renegotiation of the fourth-quarter contract price. 

 

Buyers expressed serious concerns about an increasingly weak demand scenario amid a backdrop of consistently lower feedstock values and fears of a global recession.

 

“It’s only October, so there is a long way to go with such a mess,” one integrated polyolefins producer said.

 

“The issues on demand are unprecedented,” it added, while contract cracker margins were at a peak and getting “bigger and bigger” all the time, ICIS margin analysis showed.

 

 

The fourth quarter settlement at €1,120/tonne FD (free delivered) NWE (northwest Europe), down €108/tonne, was established in mid-September. 

 

Some consumers were unhappy about it from the start. They felt it had been forced because of the need to supersede the widely derided initial €1,165/tonne settlement.

 

Now that naphtha had dropped considerably since then - around 34% - and was widely expected to remain weak for the remaining months of the year, they were even more convinced that the settlement was hugely incorrect.

 

“It’s unbelievable what is happening… they [the producers] must be making a bundle on the margins,” said one large olefins consumer.

 

While producers recognised the derivatives producers’ predicament, they said that margins had suffered badly earlier this year.

 

One producer said that it viewed current margins as “compensation” for the losses made in the second quarter.

 

“It’s clear that things have moved [since the settlement] but did we ask for a reopening on contracts in the second quarter when there was a rally on crude and naphtha?” one integrated producer said.

 

“$147/bbl crude was also an unprecedented situation. People have short memories,” it added.

 

“They had a chance to move to monthly,” said one key producer, referring to the latest attempt to move the olefins industry away from a quarterly contact mechanism to a “more responsive” monthly system.

 

“We are always open for discussion on monthly,” it added.

 

However, while most sources said that it was unlikely that the official benchmark contract price would be renegotiated, there were some signs that certain sellers were showing some flexibility in terms of discounts.

 

“We can achieve a better price for some volumes, but not everyone is willing to play that ballgame,” one large consumer said.

 

It said it was “swimming” in its derivatives and the market in general was a “catastrophe.”

 

Some sources said that the alternative to a contract renegotiation could be to invoke a “hardship clause” or force majeure, but no-one had done this yet as far as they were aware.

 

Not all market players were convinced that crude would continue to soften.

 

OPEC was expected to announce production cuts following its meeting next week and in addition, moving into the European winter months, demand for energy would likely increase, sources said.

 

However, some market observers said this producer talk was no more than clutching at straws and that uncertainties regarding the global economic situation were far more pressing and would have far more bearing on the industry as a whole.

 

Naphtha was currently being assessed at $495-505/tonne CIF (cost insurance freight) NWE, according to global chemical market intelligence service ICIS pricing, compared with numbers in the mid $700s/tonne CIF NWE when the fourth-quarter contract was established.

 

Spot ethylene prices were falling fast on poor demand and bearish sentiment globally. Pipeline prices were notionally pegged in the mid €600s/tonne although it was generally assumed that there was no spot demand “at any price”.

 

($1 = €0.74)

 

The weekly margin report for ethylene (C2) examines margins across the business chain. For a free trial and more information email paul.ray@icis.com
For more on ethylene please visit ICIS chemical intelligence

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By: Nel Weddle
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