23 January 2009 11:56 [Source: ICIS news]
By Nel Weddle
LONDON (ICIS news)--European ethylene (C2) and propylene (C3) February contract discussions, centring on increases in naphtha costs and the supply/demand situation, are under way, with participating parties mindful of reaching an agreement before the end of January, market sources said on Friday.
Ethylene was largely being talked anywhere from a rollover to plus €100/tonne ($130/tonne), while price ideas for propylene ranged from a rollover to plus €30-40/tonne on January.
Ethylene was generally being viewed as the stronger of the two.
Naphtha prices had increased around 50 per cent since January contracts were settled in mid-December and this was behind producers’ calls for an increase on both ethylene and propylene.
Contract cracker margins were now under pressure, and at low operating rates it was also increasingly difficult to cover fixed costs.
Spot cracker margins were already in negative territory, according to ICIS pricing margin analysis.
On the other hand, the demand outlook was still of huge concern to derivatives producers.
While small improvements had been seen in January compared with December, and again a small improvement was anticipated for February, there was still a great deal of uncertainty as to whether this demand was purely a result of replenishing inventory following a prolonged de-stocking period, or whether it was the start of a real and consistent recovery.
“Our customers are not willing to give us much planning for February, its day to day or week by week” one major non-integrated consumer said, pointing out that its products needed to be competitive on the global market and that currently they were not.
“We can understand that suppliers want to recover margins, but if the increase is too high, then it will cost (the producer) volume,” the consumer added.
The issue of supply and demand was overriding any feedstock gains, according to another major integrated consumer who said that it was arguing for a decrease on the propylene contract.
“I am very long [in propylene], it is more a matter of getting rid of it. As long as propylene is still being destroyed through flaring, or by putting it into LPG (liquefied petroleum gas) and exporting at very low prices, it’s a little bit contradictory to ask for a price increase,” it said.
However, one major producer said that its planning for February was looking stronger and that this would necessitate a ramp-up in its cracker operating rates.
“We’ve seen some surprises to nominations,” it said, adding “we will see another improvement (in output rates)”
Taking its February propylene nominations into account, it said that it would not have to “downgrade it [propylene].”
A couple of buyers mentioned that they were looking for a rollover on both ethylene and propylene. Their view was that an increase was unrealistic given the ongoing uncertainties over demand and not least the consequences of the speculation regarding certain companies’ financial health.
That naphtha had increased was no in doubt, but they were assuming that first quarter naphtha had already been locked in or hedged at the low levels.
However, a couple of buyers anticipated that they would have to accept an increase of some kind based on the naphtha development.
Other contract parties said that the negotiations would be tricky because of the differences in performance and outlook between the various derivatives.
“Some derivatives are really without margin and an increase is unpalatable,” a major integrated player said, “but the crackers also have negative tranches and so a rollover is unpalatable.”
“It won’t be easy to balance that whole dichotomy between market and feeds,” it added.
January ethylene was agreed at €520/tonne ($703/tonne), down €600/tonne from the fourth quarter. Propylene was settled for January at €430/tonne, down €523/tonne.
The contracts are settled on a free delivered (FD) northwest Europe (NWE) basis.
($1 = €0.77)
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