INSIGHT: Europe's quarterly ethylene mechanism is under pressure

17 December 2008 15:52  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--It is too early to herald the death of the quarterly ethylene contract in Europe but the prognosis is not good.

Pressure has built steadily for monthly olefins settlements with the protagonists, largely the big European producers, seeking to play catch-up with higher priced naphtha.

At a time of rising feedstock prices, the ethylene, propylene and butadiene makers had been seeking to pass on higher costs as fast as possible.

The more influential customers were, however, largely having none of it. Facing longer term contracts downstream they were not in any hurry to take on the job of absorbing oil/naphtha price volatility in their own businesses.

But a great deal has changed in only a few months as plastics and chemicals demand downstream from the cracker has slumped, a consequence of the credit crunch and gathering economic gloom.

The opportunity for change has presented itself particularly at the end of the current quarter given the huge disparity between feedstock naphtha and quarterly European olefins contract prices.

The current margin for ethylene based on naphtha feed is more than €1,200/tonne on a fourth quarter ethylene contract price of €1,120/tonne.

Ethylene and propylene producers have been making great money on the contract price but only if they have been able to shift volumes.

Indeed, the cost/price environment has been such that analysts have been forced to re-base graphs showing the differential between olefins and naphtha as the spreads has shot off the chart.

This anachronistic situation could not last. Across the petrochemicals business the hope has been maintained that feedstock costs and product prices could stabilise with oil sometime around the turn of the year.

The outlook may be far from rosy but price spreads down the olefins chains could become more realistic in January as ethylene and propylene prices come down in response to the weakened naphtha price and poor demand for the major olefins.

Just last week, one strong advocate of monthly olefins pricing, INEOS, reiterated its support for a monthly contract. The quarterly pricing mechanism, which INEOS said could lead to huge corrections in the monomer price, was no longer acceptable to the company’s derivative businesses or their customers.

We are seeing the start of those huge corrections now. Initial European ethylene and propylene monthly contracts for January had been agreed down €600/tonne ($822/tonne) and €523/tonne respectively by a key producer and integrated consumer, ICIS news reported on Tuesday. This translates to close to €900 off the current margin. It has been called a “table-thumping” correction.

Both parties to the deal are well-known advocates of a monthly system and had agreed what was called a “straightforward monthly price valid for January only.”

A monthly European olefins supply contact was last publicly reported in December 2006, although a handful of subsequent deals have been kept private and confidential.

The market is currently split with several key consumers and one key producer still firmly in favour of a quarterly pricing structure.

A switch to a widely accepted public monthly settlement may yet be some time off but the world appears to be turning much more sharply against the current status quo. In the short term, at least, those holding out for the traditional quarterly approach in olefins will find themselves in a difficult place.

There are one or two non-integrated olefins producers in western Europe and four major consumers who take part in the quarterly contract negotiations. Companies can, of course be net sellers or buyers and be integrated. INEOS and LyondellBasell are net olefins buyers; Dow Chemical, Shell and INEOS are merchant sellers.

($1 = €0.72)

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By: Nigel Davis
+44 20 8652 3214

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