16 February 2009 17:00 [Source: ICIS news]
LONDON (ICIS news)--Discussions for Europe’s March ethylene (C2) and propylene (C3) contracts will get under way this week with much at stake, as the debate over the quarterly versus monthly contract system is set to start again in March, market sources said on Monday.
Sources said it was clear that there was much riding on the March agreement, as it was the last monthly settlement of the first quarter.
A number of contract parties had somewhat reluctantly followed the monthly system because of the unprecedented economic situation, having stressed that it was “only for the duration” of the quarter.
The March settlement not only had to be an appropriate number reflecting both upstream and downstream fundamentals, but it also had to be agreed in a disciplined and timely fashion.
“It’s a terrible task to find this balance where crackers still make a margin and you still keep demand alive,” said a producer.
But opinions varied widely over the extent of any increase.
“[I] would expect a big step up in March. Off take is higher, naphtha is higher, negative margins are not sustainable,” a major producer said.
“March has to be much, much higher,” said another producer. “[I] don’t want to find that again I am faced with a number that is borderline in margin terms.”
A couple of producers alluded to three-digit increases for ethylene, but one key contract producer said that it could envisage an “increase along the same lines” as that seen in February.
The February contract settled €70/tonne ($90/tonne) above January.
One ethylene consumer said that it had “had an increase built in already”, while other buyers insisted that the ongoing concerns regarding fragile demand levels would have to limit the extent of any gains.
Sources said that once the March contract was settled, all European players would be focused once more on the quarterly versus monthly contract debate, with many expecting to hold internal reviews over what they had learnt about dealing with the monthly process.
“We save the biggest debate for next month,” said a source.
“There are companies that would like to go back to the QCP (quarterly contract price) and others want to propose a continuation of the monthly system,” a source said.
Another source added that the market was “completely split 50-50”.
“The problem is that, up to now, the monthly has not been done in a good manner – its supposed to be close to what has been going on naphtha. I need a price that will allow me to produce out of my cracker,” said a producer. “I prefer to stick with QCP and get a risk premium for naphtha.”
Another European producer said: “We have exactly the same problem with the monthlies as we have with the quarterly price. People say you can’t judge supply and demand for three months, but the monthly prices have showed that we can't even judge a month!”
“I had in mind a number for the quarter which, once March is settled, will not be far from [the average of the monthlies]. I am sure,” said the European producer. This sentiment was echoed by a couple of market players.
However, other market participants argued that the monthly system was still the best way to ride the waves of economic and financial uncertainty, and that most respected economic forecasts did not show this coming to an end any time soon.
“To discuss monthly for Q1 (first quarter) was the right thing to do, it was unprecedented,” said a key net buyer.
A couple of sources said that financial pressures were now playing a greater part in the discussion over which contract process the industry should adopt.
“[Some companies] will still be hand-to-mouth through April, if not through June,” an observer said. It added that “this system gives the industry the perfect possibility for each side not to suffer for too long”.
Ethylene and propylene players did agree on one fact: that the two contract systems could not work effectively side by side, as there were simply not enough contract players and it would be “messy”.
“It will be an intensive debate. We want to see a liquid market, we don’t want to see a split as we don’t have a huge number of players,” said a key producer.
February ethylene settled at €590/tonne FD (free delivered) NWE (northwest ?xml:namespace>
($1 = €0.78)
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