INSIGHT: Producers keen to recover from year-end margin fall

06 January 2010 15:58  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--There can be little doubt that the big push on prices by producers is needed. As business gets under way in January companies are keen to lift prices against the backdrop of still high feedstock costs and strengthening demand. They want to see margins restored.

ICIS data show prices rising in December and a significant annual increase from the end-2008 slump. Yet product prices have barely covered raw material cost increases in a still generally weak business environment, despite the steady increase in demand through 2009.

The ICIS Petrochemical Index (IPEX), representing a basket of global petrochemical product prices weighted by regional nameplate capacity, rose 3.6% in January as producers in Asia particularly pushed prices higher. Year-on-year, the global index was up 45.3%. That sounds good but represents only modest recovery from the low point.

Data released by ChemSystems this week show how rising feedstock costs have weighed on the sector. Petrochemicals profitability has been elusive despite improving demand, the consultancy says.

“The burden of rising feedstock costs, as crude oil rebounded, has prevented any significant recovery in petrochemical margins even as market weakness eased towards the end of 2009,” it adds.

The company’s west European petrochemical industry margin index fell to its lowest ever value, of 57, in 2009, giving an idea of just how bad the year was. The index is based on the first quarter of 1984 at 100.

Source: ChemSystems

European petrochemicals output is still well down from the high point in the first half of 2008. The European economies are recovering but industrial production remains very fragile. Government stimulus plans have helped lift demand - and pull product into the Asia market - but fears over the sustainability of the recovery remain.

The uncertainty has been exemplified in Europe by the sharp drop in aromatics prices in the fourth quarter of 2009 and their rebound in January.

The west European benzene contract price sank 20% in the fourth quarter of 2009 as downstream derivatives plants were closed.

The European January benzene contract settled up a third at €759/tonne ($1,093/tonne) boosted by stronger exports and domestic supply constraints.

European ethylene markets weakened considerably towards the end of 2009, although demand for downstream derivatives was stronger again from Asia and helped provide export opportunities. Exports to Asia helped underpin the olefins-based businesses as well as propylene derivatives.

Asia business recovered after a slow start to the fourth quarter following the extended holiday period in China. Demand rose for polypropylene in China and for both linear low density and low density polyethylene (LLDPE and LDPE).

Business in the US has improved considerably from the end of 2008 but the ethylene markets were still relatively weak in the fourth quarter of 2009. Exports helped compensate for poor domestic demand.

ChemSystems says that US cracker operating rates remained depressed in the quarter at just over 80% despite some plant closures.

US polyolefins markets were sluggish over the period with China demand keeping the market in balance. Propylene markets in the US were tight in the quarter as supplies from refineries were cut as operating rates dropped below 80% on poor margins, but markets were volatile.

The ChemSystems data particularly show the impact of rising crude oil prices on feedstock costs for much of the industry.

In October and November, for instance, Dubai crude settled at an average of $75/bbl or some 10% higher than in the previous quarter.

Average natural gas prices in the US were also higher in the first two months of the quarter with sharp increases for petrochemical feedstocks. The increases were greater for lighter as opposed to heavier feeds.

West European and Asia naphtha prices pushed to a 14-month high of more than $700/tonne at the start of December.

Propane and butane prices strengthened relative to naphtha on seasonal demand increases thereby removing the cost advantage that had been available from cracking liquefied petroleum gas (LPG) from much of the year, ChemSystems notes.

($1 = €0.70)

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By: Nigel Davis
+44 20 8652 3214

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