INSIGHT: Europe's polyolefins players face a difficult summer

20 May 2009 15:36  [Source: ICIS news]

LONDON (ICIS news)--The pressure is on for a marginal increase in olefins prices in Europe for June due to higher feedstock costs, but the outlook for producers is far from bright.

Ethylene monthly contract prices may be agreed higher given the cost pressure from naphtha, but there is clearly little demand pull down the major petrochemicals chains.

Polyethylene demand is poor, to say the least, and the draw from exports has disappeared. The propylene chain is better given the demand pull from derivatives exports to Asia, but the arbitrage window has closed.

It looks as though it will be a difficult summer for some of Europe’s largest chemicals makers.

The business clearly has been buoyed by demand  from Asia and the pull of its higher prices, but companies face the crunch of a still significantly depressed Europe.

Given the steep fall in economic output across the region, that is hardly surprising. Key customer industries for chemicals, including automobiles, construction and large-scale electrical, are still depressed. Workers across the continent are on short-working time.

The fiscal stimulus measures in the US, UK and China economies have not been mirrored by the eurozone nations. Economic recovery, largely as a result, still seems a long way off.

This depressed level of economic activity translates directly into petrochemicals demand, or rather the lack of it. There has been some uptick in output since the beginning of the year but only from a very low level. The trade group Cefic suggests that chemicals output will continue to rise, although business activity is likely to remain depressed.

This past week's contract naphtha margins had slipped by around €10/tonne ($14/tonne) due to higher naphtha prices. Slightly higher co-product credits and a weaker US dollar against the euro were unable to outweigh higher feedstock costs, giving further incentive for a push to higher prices in June.

Spot naphtha margins remained poor but were higher due to higher spot ethylene and gasoline prices, according to the latest ICIS European ethylene margin report.

Integrated polyethylene (PE) players were only making improved returns from the cracker in the second week in May while, PE demand remained depressed.

Standalone PE margins were unchanged, only barely justifying plant operations, the ICIS PE margin report said. Given the hints that the ethylene contract price will rise in June, however, there is some upward pressure on prices.

Exports to Asia were underpinning the flat European PE market earlier this month. One company even called exports to Asiaphenomenal” in trade assisted by favourable freight rates.

Domestic business, however, was poor, with demand still weak down the chain. Not much was expected of PE buyers, whose own customers weren’t buying. And there is little to suggest that they might come back more strongly over the seasonally quiet summer period.

Polypropylene exports had also been strong, helping European producers maintain plant loadings. And while domestic business remained depressed, there were signs of automotive demand improving, albeit from a very low base. Food packaging remained the only real bright spot.

A difficult summer beckons for most players in both chains in Europe, with only Asia demand proffering anything in the way of opportunity. And uncertainty abounds as buyers await the arrival of new production capacity in the Middle East.

The feeling in the market is that new offers from the Middle East would be made in the second half of the year, leading to hand-to-mouth buying globally. That will make business difficult for European producers through the early part of next year at least.

Click here to find out more on the European margin reports
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By: Nigel Davis
+44 20 8652 3214

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