INSIGHT: Talk of Asia cracker rate cuts fades on ethylene rebound

27 August 2010 12:02  [Source: ICIS news]

By Peh Soo Hwee

SINGAPORE (ICIS)--Talk of operating rate cuts among naphtha cracker operators in Asia appears to have faded amid the recent rebound in regional ethylene prices.

Producers had earlier warned of production cuts, particularly after ethylene variable margins slid below $100/tonne (€79/tonne) to hit their lowest levels this year in early August.

But the recent rebound in monomer prices and the relatively stronger performance of other olefins are still keeping cracker operating rates in Asia at enviable levels of 90-100% this month.

Ethylene margins based on naphtha feed were assessed at $213/tonne on 20 August compared with $63/tonne on 6 August, according to ICIS margin data.

“It is a little bit surprising. We were thinking that it would be a matter of time before producers start cutting rates but it hasn’t happened,” said an olefins trader based in Japan.

“They seem to be able to get credit from propylene and butadiene,” he said, referring to the relatively stronger pricing of these two co-products compared with ethylene.

Ethylene spot prices were assessed at $930-980/tonne CFR (cost and freight) northeast (NE) Asia last week while propylene was more than $200/tonne higher at $1,170-1,220/tonne CFR NE Asia over the same period, ICIS data showed.

The last round of cracker operating rate cuts in Asia was seen in the aftermath of the financial crisis in late 2008 following the plunge in ethylene prices to below $400/tonne CFR NE Asia in November that year.

Against the backdrop of a wave of new ethylene capacities coming on stream this year  – estimated at more than 10m tonnes from the Middle East, China and southeast Asia – producers are understandably cautious about the ethylene outlook in 2010.

However, the actual capacity hitting the market is probably less due to delayed start-ups of some crackers as well as production hiccups at the facilities.

Energy giant Shell, for instance, has been mainly running its 800,000 tonne/year mixed feed cracker in Bukom, Singapore, at around 80-85% after it was started up in March, market sources said.

In addition, ethylene supply in northeast Asia has been constrained by naphtha feedstock woes and the start-up of new derivative plants, drying up spot liquidity in the FOB Korea market and making spot deals difficult to locate.

“In the first half of the year, the ethylene yield was affected by heavy naphtha issues,” said a source from Yeochun NCC (YNCC), South Korea’s largest naphtha cracker operator.

“In the second half, our export volumes will be reduced by half as we have to supply ethylene to Hanwha Chemical’s Ningbo plant,” he said.

Hanwha is expected to start up its vinyls complex in China in October.

Besides supply-demand factors, ethylene price movements tend to be sensitive to product flow from the Middle East, but stronger spot prices in Europe – currently the highest globally – amid both planned and unplanned cracker outages have seen the bulk of spot material headed to the west.

This has come as a relief to producers in southeast Asia as the region tends to be the first export target for spot material from the Middle East.

However, producers in the region acknowledge that it may simply be a matter of time before new crackers stabilise operations and crank up operating rates – giving them a run for their money.

And with ethylene spot prices in Asia potentially crossing the $1,000/tonne CFR NE Asia mark this week, and closing the gap with prices in Europe, it may not been long before we see more product from the Middle East headed to this region.

($1 = €0.79)

Read John Richardson and Malini Hariharan's Asian Chemical Connections blog
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By: Peh Soo Hwee
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