Europe styrene sellers fear negative margins

28 October 2008 13:19  [Source: ICIS news]

By Peter Salisbury

LONDON (ICIS news)--European styrene producers locked into fourth-quarter feedstock ethylene contracts could see already poor cash margins become negative in November on a diminishing benzene/styrene spot spread, market participants said on Tuesday.

“The raw material is more expensive than the material itself,” said a source at a major producer. “It is simply not true that the margin is positive.”

“If you have to buy ethylene on contract, the margin is very negative,” agreed a source at another producer. “If you make the calculation, it is negative.

If the producer is integrated, and they produce ethylene, then the margin is maybe not so negative.”

Fourth-quarter ethylene contracts were settled €108/tonne down at €1,120/tonne ($1,400/tonne) FD (free delivered) NWE (northwest Europe) in September.

In October, key feedstock benzene contracts, meanwhile, had been settled at €797/tonne FOB (free on board) NWE while October styrene settlements were made at €1,110-1,166/tonne FD NWE.

Since the settlement of these contracts, spot ethylene values had fallen to $700-750/tonne CIF (cost, insurance and freight) NWE, according to global chemical market intelligence service ICIS pricing.

On Tuesday, spot benzene was valued at $375-390/tonne CIF ARA (Amsterdam, Rotterdam, Antwerp) while spot styrene was offered at $680/tonne FOB (free on board) Rotterdam, 60% plus lower than at the time of the October settlements.

The spread between benzene and styrene, seen by trade as an indicator of demand levels, was at $290-305/tonne, down 25% from $400/tonne in August.

In traditional European monthly contracting, a benzene contract is set on the basis of spot values on the second to last day of the month and converted to euros at an officially agreed exchange rate.

Styrene contracts have then generally followed movements within benzene, with three barge contracts settled publicly.

According to an ICIS poll of styrene producers, a rough estimate of the cash cost of styrene production can be obtained by adding 80% of benzene values to 30% of the ethylene price.

Using the high end of the current spot benzene range and the fourth-quarter ethylene settlement converted to dollars at the current exchange rate, this would yield an outright cash price of $732/tonne before administrative or transport costs, $52/tonne higher than the most recent spot offer for delivered material.

Nevertheless, with ethylene cracker margins above €1,000/tonne, sellers would continue to produce ethylene and co-product benzene, players said.

This in turn would lead to further falls in styrene and benzene spot prices and a lower spread between benzene and styrene.

“It has been unprofitable for the last few months,” said a trader source. “But they have to run ethylene so they have to produce styrene.”

Operating rates had been reduced, however, producers said.

“Spot prices are below the cost of production,” said a source at a southern European producer, who added that the fourth-quarter ethylene price was not absolute as some contracts would be settled on the basis of a mixture of spot and contract values.

“Everybody has cut back. Why produce if you will lose money? This gives a push to the benzene collapse though. Polystyrene [PS] is in deep crisis. Propylene oxide units are also reduced.”

The source estimated reductions in both styrene and PS at 20-40%.

“It’s not just a matter of cyclical petchem markets,” the source added. “It’s the economy that is collapsing. This is not a matter of a few months; it is a matter of a few years.”

($1 = €0.80)

For more on ethylene, benzene and styrene visit ICIS chemical intelligence
To discuss issues facing the chemical industry go to ICIS connect

By: Peter Salisbury
+44 20 8652 3214

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