INSIGHT: Plunging US olefins prices raise alarms

30 April 2010 17:41  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Sharply lower olefins prices in the US have grabbed the attention over the past few days. Prices in Europe continue to be underpinned by tight availability but there is always the sneaking feeling that the tide has to turn.

Producers have benefited greatly from price increases in the first months of the year. Take ExxonMobil which showed on Thursday that stronger margins lifted first quarter chemicals earnings by $480m compared with the first quarter of 2009, while the increase from higher sales volumes was $180m.

The margin increase has to do with lower costs as well as higher prices, but the latest reversal in the upward price trend is going to hurt.

US ethylene prices have tracked downwards over the past week reacting to the twin pressures of more supply and weakening demand.

Ethylene for May was offered on Wednesday at 42.00 cents/lb ($926/tonne, €704/tonne), down by 22% from deals done at 53.00-54.75 cents/lb late in the week ended 23 April.

The collapse in the ethylene spot market in the US was closely matched by significant weakness in propylene, ICIS reported. The propylene price was down 18% from a week earlier and expected to break the upward trend in the contract price which had risen 53% from November 2009.

Ethylene prices in Europe are still buoyed by relatively tight product availability but the feeling is very much that prices have been overblown.

Consumers have reacted to tight availability but inventories seem to have filled, with real demand growth now taking up the slack.

The rate of that growth will very much determine producers’ fortunes in the latter part of the second quarter and particularly in the second half of the year.

It is another reason to be cautious about the continued strength of the chemicals recovery if not the sustainability of the current upturn.

European olefins contract prices have reflected some of the caution or, rather the balancing of the ideas of sellers and buyers.

Ethylene settled at a rollover for May and propylene was up €20/tonne at €1,000 tonne. The downstream polymer markets are stronger but not great.

On Thursday, European polypropylene (PP) buyers said they were expecting some relief from the constant round of price increases. Those increases had pushed prices up 30%, or €300/tonne, since January.

Not surprisingly, buyers had been betting on when prices will start to fall. Internally, some thought the end of May, others June.

Polypropylene demand in Europe at the start of the year was not great but has played catch-up. Consumers are building some inventory and remain concerned that product will remain tight.

There is a broader perception, however, that prices have risen too high and cannot be sustained by demand.

Remarks from buyers suggest that while the caps and closures market for PP is buoyant, carpet makers continue to feel the pinch. 

Imports are not widely apparent in the Europe market but if volumes do begin to flow they will help make a tricky situation that much more difficult.

Petrochemicals and polymers output remains constrained by various factors and while demand has improved it does not seem yet to be sufficient to encourage significantly increased output. Prices have been underpinned by the oil price and will continue to be supported by it. The question is: for how long?

Buyers have been on the look-out for the turn and, by all accounts, expect any downward movement to be swift and deep.

($1 = €0.76)

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By: Nigel Davis
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