FocusEurope ethylene may have peaked as tight supply eases

12 February 2010 14:59  [Source: ICIS news]

By Nel Weddle

LONDON (ICIS news)--The European ethylene market may have passed its 2010 peak as tight supply eased amid improved cracker operations and derivative prices softened in Asia, market sources said on Friday.

Ethylene had been viewed as balanced to short, and from December to January demand had been better than expected, primarily driven by unexpected outages at three crackers over the Christmas and New Year break.

Higher prices in Asia had also provided support through export opportunities, alongside restocking and pre-buying activities, because of bullish sentiment surrounding the January and February contract settlements.

By the end of January, however, unplanned cracker outages at BASF's facilities in Antwerp, Belgium, and Ludwigshafen, Germany, and at INEOS’s site in Cologne, Germany, had been resolved.

INEOS lifted its ethylene and propylene (C3) forces majeures, which had been in place since 15 December, on 12 February.

“Crackers in Europe are slowly but surely improving [operating rates],” said a major integrated consumer.  

“February is the month where the situation changes,” it added. “We can still pay €820-830/tonne ($1,123-1,137/tonne) on the pipe today, but by early March this will be lower”.

Sources said that with ethylene spot levels around €820/tonne, cracker operators could still make a good margin so they were incentivised to run as hard as was technically possible.

Additionally, cracker by-products propylene and butadiene (BD) were in short supply and attracting strong demand from Asia and the US, as well as the local European market.

One source said: “There is plenty of opportunity to buy [spot ethylene volumes] in the European system, so why bother with deep-sea volumes? [There is] no need to compete with Asian prices.”

Sources pointed out ongoing uncertainties regarding demand levels, particularly for export, after the Lunar New Year holidays. Asian spot ethylene levels were already moving off a 17-month peak of $1,400/tonne because of weak derivative demand.

High prices in the region had resulted in production cuts at downstream plants. Some sources said Asian buyers had retreated to the sidelines because they had covered for the holidays and for the start of the heavy turnaround schedule. Additionally crude had shown some downturn.

Current Asian spot prices around $1,320/tonne CFR (cost and freight) southeast Asia would equate to around $1,200/tonne CIF (cost insurance freight) NWE (northwest Europe), or in the mid-to-high €800s/tonne in euro terms – too high for a potential March delivery, some players said.

Sources on the buying side said they had been offered volumes from Libya, Mexico, Saudi Arabia and Abu Dhabi, but had declined them.

“We have had loose discussions with potential buyers for March,” said a trader. “Their views on pricing are substantially below contract value, but they are not really in any rush to lock in any deal, there are no concerns regarding availability from European suppliers.”

Not all sources were of the view that ethylene would lengthen enough – at least in the short to medium term – to suggest weaker spot pricing.

“Demand is excellent for both ethylene and propylene,” said one large producer.

Another said: “Demand is good for us, not really strong. But we have no volume available for any additional demand.”

Another source said it viewed the market as well balanced and it would continue to tailor its operating rates to suit demand levels.  

Much would depend on the export opportunities afforded to European derivatives following the Lunar New Year holidays. Looking ahead to the second half of the year, there were the usual concerns about the impact of new capacities in the Middle East and in Asia.

“China is key,” said one large integrated producer. “We think we will still see good demand for export from derivatives, and with improving derivative margins, people will try and run flat out.”

($1 = €0.73)

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By: Nel Weddle
+44 20 8652 3214

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