INSIGHT: Weakness downstream not yet reflected in cracker margins

06 June 2011 17:41  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Cracker and most derivatives margins are easing as the downward pressure on the oil price and weaker downstream demand are reflected in market sentiment.

Europe’s monthly ethylene contract price was agreed down for June - the first drop in seven months - on the lower oil price, and weakness downstream in both the ethylene and propylene derivatives markets has led to talk of lower cracker operating rates.

There was little appetite for polyethylene or polypropylene in May with buyers preferring to use stocks rather than turn to the market. Yet it was a quiet month this year, with a spate of public holidays, and may not be typical or yet reflect the start of a trend.

But the slowdown in China demand has had a clear affect on sentiment, although the renewed market length has reportedly been described as manageable.

The interplay between reduced feedstock costs and prices on the turn make the situation difficult to assess.

Northeast Asia ethylene prices tracked higher in May pushed up by the rising price of crude and tighter supply because of schedule cracker maintenance. More supply is coming back on-stream, however, at a time of seemingly persistent oil price uncertainty.

Northeast Asia cracker margins

That in itself is driven by global concerns about the strength of the economic recovery. Poor US employment statistics helped knock the oil price back on Monday. The attempts by the Chinese authorities to curb inflation have had a clear impact on polymers demand. There are global implications.

Ethylene margins were weaker in southeast Asia last week, according to data just published by ICIS, following an $85/tonne decrease in ethylene prices taking them to the lowest point since January.

By contrast, naphtha-based ethylene margins in northeast Asia were higher but only on a 2.6% fall in feedstock costs. Ethylene prices were down $30/tonne and co-product values, primarily for propylene, were lower too.

Naphtha-based producers benefitted greatly at the end of April from the slide in the oil price but have seen margins eroded since as polyethylene markets in Asia and in Europe have weakened.

Contract ethylene margins in Europe based on naphtha feedstock were $84/tonne higher last week as lower naphtha prices and a weaker US dollar pushed feedstock costs down 5.6%.

But the pressure on producers is highlighted by the fact that further margin gains were not available because co-product credits were flat. Propylene and benzene contract prices were lower, although the butadiene contract price rose.

US producers continued to benefit from relatively high ethylene contract prices which have gained almost 30% since January.

Prices in the downstream polyethylene market are not strong and being pressured by imports from Asia. But at the cracker, average margins in May based on advantageously priced ethane feedstock are the highest since April last year. Naphtha-based ethylene margins are the highest since October 2008.

Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog
Read Paul Hodges’
Chemicals & the Economy blog

By: Nigel Davis
+44 20 8652 3214

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