23 December 2010 12:31 [Source: ICIS news]
LONDON (ICIS)--Firm feedstock costs and a strong US dollar has pushed the European propylene (C3) January monthly contract price (MCP) up 11.5% to a record high, while the ethylene (C2) contract price is the highest seen since the fourth quarter of 2008, market sources said on Thursday.
Propylene settled at €1,070/tonne ($1,408/tonne), up by €110/tonne from December. The previous high was when the contract settled for the third quarter 2008 at €1,015/tonne, although in May and June of this year contract prices hit €1,000/tonne.
Ethylene was up by €105/tonne to €1,110/tonne for January, still some way below the record high of €1,228/tonne confirmed for the third quarter 2008.
The contracts, which settle on a free delivered (FD) northwest Europe (NWE) basis, were first agreed late on 22 December by a major producer and a major integrated consumer. Remaining contract buyers and sellers were quick to follow.
Olefins producers were able to secure three-digit increases on both C2 and C3 because of negative pressure on cracker margins and a tighter-than-expected supply and demand balance.
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. This was why a higher increment was achieved for propylene than for ethylene.
Discussions had got under way at the end of last week amid some additional time constraints as contract parties were eager to reach agreement ahead of the holidays.
The tough negotiations were further complicated by the increased volatility of crude and naphtha earlier this week.
“Each day we woke up and crude was up and exchange rates stable, it was getting more critical from a producer's point of view,” a key producer said.
Consumers recognised that an increase was justified, but there were concerns about passing such sharp increases on downstream, although some sectors would be more capable than others.
“I would describe this as the most difficult MCP so far. The difficulty faced by polyvinyl chloride (PVC), vinyl acetate monomer (VAM), linear alpha olefins (LAO) etc to compete globally with such prices was a major part of the discussion,” a major integrated ethylene and propylene consumer said.
“It’s a steep increase, even though we know the crackers needed it,” said a key propylene consumer.
“Time will tell whether we can recover this increase, we are looking at a very high price that we haven’t seen before,” it added.
“It’s a fair compromise” said a second major producer referring to the propylene settlement, but added “it will be key how derivatives pass on the increase”.
Sources said that it would be interesting to see how the supply and demand balance for both ethylene and propylene played out in Europe during January.
Because of the cost pressures, derivatives might not produce the marginal tonne and this would reduce monomer consumption. On the other hand however, producers have been able to recover part of their margin and so crackers operating levels should be good.
Olefins supply was tight moving into the year-end because of overruns on cracker maintenance, some unplanned outages, and cracker reductions at certain sites for economic reasons.
Additionally, demand has been 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.
Spot prices were very firm and were being indicated around €1,000/tonne FD and above for both ethylene and propylene.
One producer said it was still dreaming of finding "cheap naphtha and a weak US dollar" under the Christmas tree.
($1 = €0.76)
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