Europe cracker margins start 2010 under pressure

12 January 2010 14:00  [Source: ICIS news]

By Nel Weddle

Steam cracker at BASFLONDON (ICIS news)--European cracker margins are starting the new year under pressure despite supply problems and healthy demand which has helped to strengthen spot prices, market sources said on Tuesday.

The higher ethylene price for January, which was up by €30/tonne ($43/tonne) at €870/tonne, and stronger co-product values, was not enough to offset the surge in feedstock naphtha prices.

In the week to 8 January, contract margins were assessed at €146/tonne, down from the average €240/tonne seen in December, according to ICIS pricing margin analysis. Generally, €100/tonne is seen as the minimum level at which fixed costs are covered

Since the ethylene contract settlement on 21 December naphtha prices have risen to the mid $700s/tonne CIF (cost insurance and freight) from the mid $600s/tonne, a gain of 12% and few sources anticipate a softening of crude or naphtha in the near to medium term.

Several sellers agreed that sales volumes were good, particularly for spot volumes which had led to an improvement in spot margins, but contract margins were poor. Spot margins were pegged at €174/tonne, above contract margin for the first time since August 2008.

Spot/contract ethylene Europe 2008/10

Because of weak cracker margins, sellers were already positioning for an increase for February contracts.

“There will be a very strong correction, otherwise what’s the point of producing,” said a major producer.

Others said that the direction “was quite clearly up” not only because of the need to improve margins but also to take into account the tighter supply and demand balance.

However, it was not clear whether the most of the demand could be attributed to sellers looking to fulfil their contract obligations by searching for alternative volumes because of recent and ongoing production problems, and re-stocking rather than it being a real improvement in structural demand.

No specific targets were divulged at this stage since contract negotiations were not expected to get under way for another couple of weeks.

2009 as whole was disappointing for olefins producers since the average contract margin was the lowest seen throughout the whole decade, having sunk below the previous low in 2002.

That margins were already under pressure in 2010 posed a problem for producers facing a potentially difficult “year of two halves” because of the expected impact of new Middle East and Asian capacities.

($1 = €0.69)

For more on ethylene visit ICIS chemical intelligence
Click here to find out more on the European margin reports
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By: Nel Weddle
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