17 December 2010 14:35 [Source: ICIS news]
LONDON (ICIS)--European ethylene (C2) and propylene (C3) January contracts will rise significantly because of high upstream costs and tight supply and demand fundamentals, market sources said on Friday.
Producers were targeting three-digit increases for both products. The largest adjustments so far in 2010 had been from January to February when the ethylene and propylene contracts increased €70/tonne ($92/tonne) and €85/tonne respectively.
“Producers are quite aggressively targeting increases, [but] given cracker margins, numbers should be justifiably higher,” a major consumer said.
Cracker margins were under negative pressure from recent and ongoing strength in the crude oil and naphtha markets. A weak euro was exacerbating the impact of higher US-based costs and the result was that the average contract margin for December was the lowest it had been all year.
Cracker margins were “in one word, a disaster”, a major producer said.
In addition to the cost pressure, supply for both olefins had tightened over recent weeks because of overruns on planned maintenance, slow restarts following the French strikes and reduced operating rates prompted by economics and cold weather.
Demand was unusually healthy for December, which sources said was a combination of recovery in the aftermath of the French strike-induced production constraints, reasonable export interest and most latterly, some pre-buying activities.
However, a key issue was whether derivative markets could absorb high increases and pass these on downstream.
Some sectors would be able to recover the costs, but for others such as high density polyethylene (HDPE), polyvinyl chloride (PVC) and possibly phenol, a sizeable increase would be of concern and could lead to some cutbacks in monomer consumption, sources said.
In general, the view was that propylene derivatives were in a better position to be able to absorb and recover the costs.
“C3 derivatives have a better capability to absorb larger increases, they can absorb an increase and still have good margin,” another major producer said.
A tighter supply and demand balance was also being envisaged for propylene in January because of some planned maintenance shutdowns at on-purpose propylene production. With this in mind, there was some expectation that this should be reflected in the propylene settlement with a higher increment being achieved than for ethylene.
“C3 is stronger than C2,” an integrated producer said.
Sources anticipated that settlements would be confirmed next week, ahead of the Christmas and New Year holidays.
There had been some talk suggesting that an agreement could be reached as early as Friday, but sources agreed that this was now unlikely adding that further discussion was needed in view of upstream volatility.
($1 = €0.76)
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