INSIGHT: Exporters face the return of China capacities

26 June 2009 16:00  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Ethylene contract prices in Europe have been pushed up €80/tonne ($112/tonne) to €785/tonne from July.

The size of the increase, and its timing, show producers are trying to recover lost ground against higher naphtha costs which have destroyed cracker margins over the past few weeks.

If anyone needed reminding, though, this is a tough time for olefins makers and those integrated downstream.

Export business to China is propping up shaky polymers businesses. Cracker margins have been negative as naphtha prices have tracked higher with oil. Yet passing costs on has been far from easy given the depressed nature of many downstream markets and a lack of demand from the end consumer.

Green shoots of recovery there may be in some parts of the world but the euro zone economies remain depressed. The OECD in its June economic outlook published this week said it saw few signs of an upturn for the region.

Cracker output in Europe has been estimated at a low 75-80% of available capacity and polymers production has been cut back accordingly. The cutbacks have tightened supply of polyethylene (PE) and producer inventories are low. The business has been propped up by exports. And now, the higher oil price has prompted a wave of speculative pre-buying as customers try to beat prospective price increases.

The underpinning of the market, however, remains weak and estimates suggest PE demand in Europe is down 18% from last year. That does not augur well for the slower upcoming northern hemisphere summer months.

The polyolefins markets have been reflecting more stable regional economies and, to some extent, recovery. Higher naphtha costs, however, have hit European and Asia producers hard.

Producers have switched to cracking gas feedstocks, which give higher margins, where they can.

Naphtha prices in Europe have doubled since the start of the year and risen by more than a third since May, pushing olefins and co-product margins lower.

In Asia, the spot naphtha price had spiralled upwards by $160/tonne from the beginning of May to approach $600/tonne by the end of the month. Prices pushed higher into June. This has hurt cracker margins, according to ICIS pricing weekly margin analysis.

In the US, the polyethylene business has been buoyed by exports this year, with one producer said to have exported 40% of its production. The large ethane cost advantage for many companies has been played to the advantage.

Producers nevertheless are trying to drive though feedstock cost related price increases; and there are some concerns over possible tightness as the hurricane season approaches. The underpinning for the domestic market, however, remains weak. And market participants are said to be watching for signs of weakening export volumes as new capacities come on stream in the Middle East and Europe.

It has been difficult to spot the new product to date but it is on its way. The chart reproduced here, from the ICIS worldwide ethylene plant report, shows historical and projected ethylene capacities, shutdowns and availability in China.

China ethylene capacity

The drop in availability earlier this year is clearly seen as cracker maintenance turnarounds were taken. But these plants come back on stream as the wave of domestic China capacity additions begin.

According to data from CBI, China’s cracker capacity in 2008 was 9.78m tonnes and unchanged for the second year since 2006.

The ethylene chart shows capacity and availability movements this year during planned turnarounds. In support of the government incentive plan, China will bring on stream 3.56m tonnes of new capacity in 2009 and another 1.30m tonnes in 2010.

These are singificant sums and will help depress China import demand, particularly towards the end of this year

Producers across Asia, in Europe and North America have seen the best of the 2009 surge. China export opportunities will become thinner while domestic business continues to struggle to recover from the worst slump in decades.

($1 = €0.71)

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By: Nigel Davis
+44 20 8652 3214

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