Europe February C2, C3 driven up by tight supply, strong demand

27 January 2011 15:32  [Source: ICIS news]

By Nel Weddle

LONDON (ICIS)--Increases in the European February ethylene (C2) and propylene (C3) contracts have primarily been driven by tighter than expected supply and strong demand, market sources said on Thursday.

Propylene was up by €35/tonne to reach €1,105/tonne ($1,514/tonne), a new record high for the second month in a row, while the €1,135/tonne settlement for C2, the second highest since the third quarter of 2008, marked an increase of €25/tonne.

The majority of sources from both the buying and selling sides said the magnitude of the price hikes was in line with their expectations given prevailing market conditions.

“We cannot do more,” a major Mediterranean-based olefins producer said. “I am happy right now [with the adjustments] given current conditions - consumers can’t pay a premium for something [firming feedstocks] that might not happen.”

The higher increment for propylene compared with ethylene highlighted the firmer fundamentals, sources said.

Planned maintenance shutdowns at on-purpose propylene producing units were already underway, preparations were in hand for upcoming turnarounds and there was still an element of catch-up following the French strikes in October which significantly impacted refinery-based as well as cracker production.

“The €35/tonne is fully in line with our expectation, the market had to go up,” said a major propylene seller.

It said that reasons behind the increases were that spot availability was tight and spot prices were as a result above contract. In addition, US prices were “crazy” and steps had to be taken to bridge the gap and close the arbitrage.

“Derivative margins are quite good,” the major propylene seller said, adding: “€35/tonne is not difficult to recover.”

The first propylene settlement was reported early on Thursday between a major integrated consumer and one of its suppliers, the major Meditteranean-based producer.

Almost simultaneously, a major olefins producer and a non-integrated propylene consumer had come to another agreement at €1,107/tonne, or up by €37/tonne, but this was later rescinded in favour of the initial settlement.

“I am not going to make a party for the sake of two euros,” the major olefins producer said.

The initial ethylene settlements were reported late on 26 January, and were between the major olefins producer and two of its customers, both polyvinyl chloride (PVC) producers.

PVC was widely regarded to be one of the worst performing ethylene derivatives having consistently failed to keep up with monomer increases throughout the whole of 2010.

“It's important to have PVC in the settlement again.. to have them part of the pricing mechanism,” the major olefins producer said, alluding to concerns held by some that the price settlements are weighted towards the integrated polyethylene (PE) and polypropylene (PP) sectors.

It had been fairly clear quite early on in January that February’s contracts would be subject to some sort of increase and this was primarily in view of  firming feedstock values.

As the month wore on it also became apparent that the high contract settlements for January had failed to dent demand which remained very strong, while a number of  production hiccups kept constraints on supplies.

However, as the discussions got under way, producers’ arguments regarding restoring cracker margins took more of a back seat as naphtha prices slumped and the euro gained in value against the US dollar. The supply and demand situation then became the primary driver in the discussions, particularly as reports of a couple of unexpected production issues emerged this week.

($1 = €0.73)

For more on olefins visit ICIS chemical intelligence
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By: Nel Weddle
+44 20 8652 3214



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