Europe butadiene players expect strong increase in Q2 contract

18 March 2010 17:15  [Source: ICIS news]

LONDON (ICIS news)--Second-quarter contracts for butadiene (BD) in Europe will see a strong increase on the first quarter’s €950/tonne ($1,301/tonne) because of firmer upstream costs and a tight supply-and-demand balance, market sources said on Thursday.

Contract negotiations were getting under way this week and while all contract participants accepted that the direction was up, the gap between the buy-sell starting positions was large as perceptions over future supply-and-demand balance differed widely.

So far, discussions appeared to be centring around increments of between €150/tonne and €450/tonne, depending on source.

The consumers' view was that the supply-and-demand balance was set to ease in the second quarter, when unplanned production problems would be resolved and scheduled maintenance shutdowns mostly completed. In addition, a major BD consumer would be on a scheduled turnaround, which would also help to alleviate the supply pressure.

Some European consumers also felt that discussions should focus purely on European market fundamentals and not those of the US or Asia. Supply issues in both regions had meant that European spot prices had soared way above contact value and it was this seemingly ever-widening disparity between spot and contract values that producers were seeking to fill.

One large consumer added that the contract price covering the vast majority of European volume should not be settled on the back of prices based on “just 5% or less” spot volume.

“In my opinion it [the contract] should be less than €1,200/tonne,” the large consumer said.

Another consumer said: “We will try to push for €1,100-1,150/tonne.”

Producers said that even disregarding the bullish fundamentals in the other regions, the domestic view was firm as European demand was expected to be healthy. Their preliminary nominations for April and May from customers were looking strong.

Supply was likely to remain a constraint in the second quarter because producers said that not all scheduled maintenance shutdowns would be completed before the end of the quarter. Additionally, cracker operators usually favour lighter feedstock cracking moving through the spring, and this would limit the production of the butadiene feedstock crude C4.

One producer added that it was “not at all confident” that the industry would be able to maintain current cracker operating rates, in reference to the weaker tone on ethylene, the main driver of European cracker operations.

That European demand was expected to be healthy appeared to be borne out by one or two butadiene buyers.

“It's true that customers want to run at maximum rates in Q2 – we are looking at maximum contract volumes," the large consumer said. "This is because we have to make up a shortfall due to upstream disruptions and we also push European operations harder to compensate for higher prices and supply difficulties in other regions.”

There was also some disparity between producers’ price ideas.

“[We] need to get €1,250-1,300/tonne, this is a good level,” a producer said. However, another major butadiene producer said: “It's our view that the QCP [quarterly contract price] should be at a premium to the monthly price… we are looking at a €1,400-1,500/tonne range”.

A third producer said: “Somewhere around €1,200/tonne should be reasonable.” However, it added that even at €1,200/tonne, European buyers faced losing molecules to export.

Meanwhile, a fourth producer said that “ a contract price above €1,300/tonne would be fair… we have lost a lot of margin in the first quarter”.

Sources said that some end-user markets, such as construction, had only just begun to awaken following a longer-than-expected winter slowdown and that a strong hike in costs would be a heavy burden for them to carry and could damage demand. Similarly, those supplying the automotive sector were unsure how far prices could be pushed since stimulus packages had been removed earlier this year.

However, the fourth producer said: “Customers have had time to prepare [their customers] for a significant increase. It's been easy to predict that numbers will increase.”

A consumer said: “It's difficult to assess what will make [users] push back on demand. At the end of the day, I hope a reasonable settlement will prevail.”

The butadiene supply-and-demand balance had been tightening in Europe since the start of the year. Reductions in cracker operating rates through the fourth quarter of 2009 and into the first had restricted crude C4 feedstock, and unplanned problems – notably at SABIC’s two European units – and more recently BASF’s unit in Germany - had also affected butadiene availability.

Exacerbating the supply restrictions, firmer markets first in Asia and then latterly the US because of supply disruptions meant that demand for export was very strong and European spot prices had soared as a result.

Spot prices were currently pegged close to €1,600/tonne FD (free delivered), according to global chemical market intelligence service ICIS pricing.

The BD quarterly contracts are agreed on a FD NWE (northwest Europe) basis.

($1 = €0.73)

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By: Nel Weddle
+44 20 8652 3214



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