OUTLOOK '10: Europe olefins producers face a year of two halves

28 December 2009 11:00  [Source: ICIS news]

By Nel Weddle

Jubail crackerLONDON (ICIS news)--European olefins producers are steeling themselves for a year of two halves in 2010, with some relief expected early on due to delays in new capacities from Asia and the Middle East, industry and market sources said.

But in the second half of next year, a wave of new polymer capacities could hit the global market place, at best displacing European export tonnes and at worst seeing polymer and monomer tonnes being imported into the region.

Sources said it was clear that 2010 would still be weak because of the approximate 8% global capacity addition of ethylene (C2), with 36% of that originating in the Middle East.

With C2 being the main driver of European cracker operations and demand for its key derivative, polyethylene (PE), this would doubtless have a negative impact on cracker rates.

“How bad or good the olefins market is will depend on polymer penetration into Europe,” said a major producer.

The only certainty was, sources felt, that average European cracker rates would continue to be below maximum capacity.

Crackers had run throughout 2009 on a reduced basis. The fourth quarter of 2008 to the third quarter of 2009 saw closures for the first time since the early 1990s, because of low demand and poor economics.

Cracker rationalisation” was an often-repeated phrase  indeed, it was the only outcome to the expected onslaught of new capacities, sources said. But who would be first and when?

Most industry players have their own ideas as to which companies in Europe would idle or shut down crackers indefinitely.

“New capacities are all coming. [I] don’t see it possible for this material to be around without affecting cracker rates in Europe,” said one olefins trader.

Those involved in the propylene (C3) and butadiene (C4) chain markets were a little more positive about the outlook for 2010.

Reduced European cracker rates; increased lighter feed cracking due to the volatility of naphtha in Europe; ethane-based new capacity in the Middle East; and, for propylene, reduced output from refinery-based production would all combine to keep supply on a short leash  finely balanced with periods of extreme tightness, some sources said.

Already, the start of 2010 for both propylene and butadiene/C4s was looking reasonably firm, sources said.

Propylene and butadiene-derivative demand had been better than expected in the fourth quarter. Also, stocks were low and unplanned problems with butadiene extraction units would impact supply through the first quarter, in addition to planned maintenance on refinery-based propylene production and extraction units.

One little chink of light was that the Asian cracker maintenance schedule would be heavier in 2010 than this year, with 22 crackers out compared with this year’s 15, sources said.

This might help in some small way to mitigate some of the impact from new capacities. Also, there could be additional operational hiccups at some of the massive new units.

Some sources said the outlook for the second half of the year might not be as disastrous as some would believe. However, margins throughout the chain would remain under pressure.

“It will still be a bumpy ride, it will still be volatile. But we are probably off the bottom,” said a major producer.

A key consumer said: “We are not believing in strong markets. Capacity for sure won't be full.” The key consumer added that “our business still won’t be beautiful”.

The olefins industry finally moved to a monthly mechanism from quarterly pricing in 2009, which had been long derided by certain industry players as an outdated, unresponsive system.

Since the first monthly settlements in January, both ethylene and propylene saw consecutive price increases.

Ethylene settled for January at €520/tonne ($749/tonne) FD (free delivered) NWE (northwest Europe), but ended the year around 62% higher. Similarly, propylene was 74% higher in December compared with the price of €430/tonne at the beginning of the year.

Already for 2010, January settlements have been agreed at still higher levels: €870/tonne and €790/tonne for ethylene and propylene respectively.

Uncertainty, lack of visibility, cautiousness and insecurity have been key terms to describe European olefins in 2009; they look likely to prevail into next year.

($1 = €0.69)

For more on ethylene, propylene and butadiene, visit ICIS chemical intelligence
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By: Nel Weddle
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