INSIGHT: Cash margins negative for the NE Asia cracker operator

07 November 2011 17:09  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The steep drop in prices globally is hitting chemical companies hard, driving cash margins lower for integrated as well as standalone producers.

The speed of the fall has been surprising in some ways but has mirrored the deep uncertainty that has gripped financial and commodity markets.

Chemical producers and buyers have responded by cutting their operating rates and inventory. No-one wants to be caught with high-priced stocks if prices fall further.

Benzene prices in northwest Europe have fallen by 29% since the end of April, ICIS blogger Paul Hodges noted on Monday. Naphtha in Europe is down by 20% while Brent crude is 12% lower, he said. Asia market spot prices have reflected market nervousness for months. Purified terephthalic acid (PTA) prices have fallen by 18% since the end of April, Hodges wrote in his blog.

On Monday, ICIS reported that adipic acid prices in China had fallen by 36% in the past two months because of weak demand.

Hodges noted that high density polyethylene (HDPE) prices in the US were down by 20% but that buyers were starting to re-stock in the Chinese and South American markets. This latter statement underscores the hand-to-mouth strategy adopted by participants in so many chemical value chains.

The price falls generally reflect weakness in important end-use markets for chemicals such as textiles.

Producers had a successful first three quarters of 2011 and were able to post year-on-year growth in sales and profits. But some parts of the industry were already showing weakness in the third quarter – the decorative paints business being one. Volumes were weaker and prices were under pressure.

However, particularly in the past few weeks, producer prices have dropped, in some instances sharply. Butadiene is a case in point – and is one of the products that has made a great deal of money for companies cracking naphtha.

Butadiene prices in northeast Asia have plunged by close to $900/tonne in the past month, and were at close to $1,600/tonne free delivered (FD) NE Asia on 4 November, a return to late-August 2010 levels. They had spiked to $4,125/tonne at the end of this July. The picture for this C4 is very similar in Europe, with butadiene prices dropping by $550/tonne in the past month.

Crackers and downstream product makers have been hit hard by the price slump, with the data suggesting that some should be loss-making.

ICIS data suggest that a representative production complex in northeast Asia would have been losing money simply on a variable cash-cost basis, based on current feedstock and product prices.

The ICIS variable cash-cost margin looks at a typical naphtha cracker producing ethylene and cracker co-products (such as propylene, C4s such as butadiene, and aromatics) and downstream units for high density polyethylene (HDPE), styrene and polypropylene (PP).

The chemical facility variable cash-cost margin turned negative on last week’s product prices and naphtha/utility costs model.

The average northeast Asia facility was making a relatively healthy cash-cost margin in the second quarter but the strain was starting to show with standalone variable cash-cost margins on HDPE, styrene and PP individually negative. The money was being made at the cracker on ethylene itself and on the co-products, butadiene among them.

In the past few weeks, however, the rapidly declining butadiene price and lower olefins prices generally have eaten into margins.

The impact on producers in northeast Asia is most noticeable. The latest ICIS margin report for the region shows that naphtha-based cracker margins fell by almost $100/tonne last week to their lowest level since May 2009. Co-product credit values were 2.6% down, mainly on lower butadiene prices. Ethylene prices were down by $25/tonne and feedstock costs were up by 0.6%.

Ethylene (naphtha) margins for complexes in southeast Asia were at a 29-month low, although ethylene prices were unchanged from the previous week.

Naphtha cracking in Europe has not slumped as hard or as far but has become much less profitable.

On Monday, ICIS said that contract ethylene cracker margins based on naphtha feedstock are down by 30% this week, and are at their lowest level since April.

Contract margins fell by €162/tonne ($224/tonne) week-on-week because of a 4% rise in feedstock costs. A slight rise in naphtha values was magnified by a 3% strengthening of the US dollar.

The November ethylene contract in Europe settled at €1,095/tonne FD (free delivered) NWE (northwest Europe), down by €20/tonne from October.

Make sense of business cash costs with ICIS weekly margin reports
For more on ethylene read ICIS chemical intelligence
Read Paul Hodges’ Chemicals & the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

($1 = €0.73)

By: Nigel Davis
+44 20 8652 3214

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