FocusEurope olefins urge caution to avoid a 2008-style replay

16 September 2011 16:05  [Source: ICIS news]

By Nel Weddle

LONDON (ICIS)--Players in the European ethylene and propylene market urged calm on Friday amid concerns over the potential impact on demand from the negative economic outlook.

A lack of consumer confidence resulting from economic uncertainty could prompt an overreaction, several market participants said. With memories of the difficult 2008 fourth quarter still fresh, they fear this could lead to a panic situation and become a self-fulfilling prophecy.

At the end of 2010, olefins players who were asked for their 2011 outlook, said it was likely to be a year of two halves with the second expected to be more of a struggle to balance margins against volumes.

Although there would be the inevitable onslaught of new Middle East olefins and polyolefins capacity, players were confident that they would be able to adapt and manage whatever was thrown at them, as they had done so in better-than-expected 2010.

“We knew that the fourth quarter would be slow, but it doesn’t help that the expected revival in Asia has not happened,” a key integrated producer said.

No-one could have predicted the turmoil in the global economy, but “we have to be cautious and alert, we should not panic”, the producer added.

A second key integrated producer said: “I want to avoid talking about it,” adding that when it is discussed frequently, “we become more convinced it will happen. It’s reality that underlying demand is not what it was before, but we live with that.”

The future is uncertain and the lack of visibility, as in the fourth quarter 2008 to early 2009, has returned, sources said. But one positive factor was that inventories had been closely managed since 2008, and in that respect the downside, although inevitable, is expected to be limited.

Cracker operating rates have had to be trimmed in order to counteract lower-than-expected demand. This is in spite of three planned cracker turnarounds already underway in Germany and France.

Cracker operators particularly under pressure are the integrated polymer players. Other ethylene and propylene derivatives so far appear to be performing in line with general expectations. At least they continue to take allotted contract volumes, although this could be more of a catch-up function following planned and unplanned production issues in the summer.

While a couple of olefins producers report that their assets continue to run at maximum rates, other market participants are not quite convinced that this is the case.

“Generally the whole market is reacting in a certain way, and I don’t think anybody is the exception,” the first integrated producer said, without disclosing the extent to which its own assets had been cut back.

The ethylene spot market is quiet. This in itself suggests a rather balanced supply and demand scenario. But bearish pressure is growing, sources said, as downstream polyethylene (PE) is being weighed down by cheap imports.

Sources said that the spot market is “dead” and that there is little buying appetite because nobody is willing to take any action and no one dares to commit.

“People wait until the last moment to buy, but at the same time I don’t want to commit before I have a better view of the month ahead,” the first integrated producer said.

The situation for propylene is a little more extreme. Not only is its key derivative polypropylene (PP) under more downward pressure compared with PE, but propylene balances have also been affected by a raft of other derivative production issues.

“We are struggling with PP. It’s subdued; the September recovery that was predicted is not happening,” a net propylene consumer said.

October contract discussions are expected to get underway in the next couple of weeks, with a settlement preferably agreed ahead of the European Petrochemical Association (EPCA) conference in early October.

It is too early for sources to divulge price ideas, but many recognise the difficulty of marrying upstream volatility, exchange rates and the needs of supply and demand.

“We are concerned about the upstream impact, but this is the third consecutive month where there is such a large spread between spot and contract prices,” one propylene consumer said.

“Either we have a significant reduction on [olefins] volumes or a significant reduction in price to help us to be more competitive,” the net propylene consumer said.

Ethylene settled for September at €1,115/tonne ($1,549/tonne), down by €5/tonne from August. Propylene settled at a €37/tonne decrease to €1,078/tonne. The contracts are settled on a free delivered (FD) northwest Europe (NWE) basis.

($1 = €0.72)

For more on ethylene and propylene visit ICIS chemical intelligence
Find out more about the European margin reports

By: Nel Weddle
+44 20 8652 3214

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