30 June 2011 15:05 [Source: ICIS news]
LONDON (ICIS)--European ethylene and propylene settlements for July have settled down for the second month in a row on poor demand and lengthening supply, but many are not convinced that the reductions will be enough to stave off further bearish pressure, market sources said on Thursday.
Ethylene was agreed at €1,090/tonne ($1,580/tonne), a reduction of €95/tonne from June, while propylene settled down by €75/tonne at €1,130/tonne. The contracts are agreed on a free delivered (FD) northwest Europe (NWE) basis.
For both markets, the adjustment was the largest reduction since the monthly contract system began in 2009.
The sizeable reductions in the contract prices (CPs) were widely expected since demand for the key derivatives, polyethylene (PE) and polypropylene (PP), has been weakening since mid-May. Supply was lengthening as a result and then, to top it all off, naphtha prices fell to four-month lows.
Polyethylene in particular has been under pressure from more competitively priced imports as a result of a slowdown in demand in Asia, notably in China.
Other non-polymer derivatives, such as oxo-alcohols, phenol, ethylene oxide (EO) and ethylene glycol (EG), continue to perform well but some sources have seen demand from the export sector drop off because European derivatives remain uncompetitive globally and China demand is weak.
That the adjustments were the largest seen for some time is not to be disparaged but nevertheless, some players are concerned that the reductions – particularly on ethylene – will not be enough to redress the balance and align European PE and PP markets more closely with events in the global marketplace.
High stocks at polymer producers are already giving rise to the expectation that August contracts will have to reduce further. Add to that any seasonal slowdown and players keeping a very close eye on stock levels, and the outlook is less than positive for many.
Spot PE prices have already been reported below €1,000/tonne FD NWE and there is little sign of the downwards pressure abating. Although there is talk that buying activity in China should improve for August, largely because of planned maintenances in the region, sources say that it will take time for European stock levels to be drawn down as there is still a very wide price gap.
“I am very surprised that [the] ethylene MCP [monthly contract price] did not drop further, it will not help the current market situation,” said a trader.
Spot business is hard, according to traders that are increasingly faced with a lack of buying interest and buyers calling for ever-lower numbers.
“I have not been looking into [spot] ethylene. It's just too ugly,” one trader said.
Poor demand has meant increasing ethylene and propylene supply from local producers as well as foreign producers attracted by the price and signs that there might be demand, albeit opportunistic. The extent to which cracker operators may already have cut back operating rates has been a key talking point in industry circles over the past month.
The general view is that the contract price reduction may not be enough to avoid more significant cracker reductions.
Sources said that it is interesting to note that the first settlers on the buying side for ethylene were from the polyvinyl chloride (PVC) sector. The consumers from this sector were keen to limit the downturn as this could have a damaging effect on a market that has been slow to pick up and recover rising upstream costs, unlike that of polyethylene.
“Polyethylene [producers] were looking for more as they have bigger market problems,” said a major ethylene producer.
“I don’t want to destabilise my own markets. My customers will be wanting to see some reductions,” a non-polymer, ethylene consumer said.
“In my opinion, the numbers are OK,” a key ethylene and propylene producer said. “However, now I am a little bit worried as naphtha has gone up again.”
The producer added that the contract parties try and do the best they can with the supply-and-demand forecast to try and make the continent more competitive, only to be jeopardised by speculators on the upstream markets.
However, even with the upswing in naphtha and the lower contract settlements, most sources say cracker margins remain healthy.
($1 = €0.69)
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