OUTLOOK '12: Europe olefins players aiming to find balance

27 December 2011 16:17  [Source: ICIS news]

By Heidi Finch and Nel Weddle

LONDON (ICIS)--European olefin players expect a slow, moderate recovery in demand during 2012, pending some economic improvement.

However, cracker margins could remain quite muted as sources foresee little relief from upstream pressures, while the price evolution for ethylene and propylene will be influenced by the need to maintain downstream competitiveness.

Sources said it is very difficult to gauge demand for next year, because of the uncertain economic outlook and the high volatility in the upstream markets.

One producer said: “It is difficult to predict for next week, let alone next year.”

A second producer said: “Visibility is still really low, so [we] have to be prepared for all scenarios.”

Despite this, there is a degree of “cautious optimism” among players, which expect that demand in January will be flat to slightly better than in December, although this is likely to be because of restocking rather than any significant improvement in underlying demand, as players return back to the markets after the Christmas holidays.

The second producer said: “January will be better than December because of restocking, but will end-user demand really improve?”

The first producer said: “People will still have to have some safety stock levels so would expect some improvement, but don’t expect miracles.”

While sources anticipate that the first quarter of 2012 will be challenging, they anticipate that it will be better than the difficult market seen at the end of 2011.

“The first quarter won’t be easy, it won’t be great and it won’t be bad. A lot depends on psychology,” said one olefins consumer, which added: “There is too much focusing on what’s happening in the world, rather than focusing on the actual markets.”

They are hopeful that there will be a more significant improvement in demand from the end of the first quarter onwards, based on an expected revival in the Asian market after the Lunar New Year holidays.

Producers are likely to keep cracker rates reduced at least in the early part of the first quarter, until they see some sustainable improvement in demand and some recovery in cracker margins. Cracker operators had been forced to turn down rates from September because of the drop in demand and on average are currently operating at around 6570%.

Plant reliability issues, especially during the winter months, and the fact that upstream costs could remain high or even increase further, could also stimulate some demand, as downstream players need to restock in the new year.

The cracker turnaround schedule for Europe in 2012 (see table below) will be modest, with only six crackers slated for maintenance, and these are weighted towards the end of the year. However, Polimeri Europa announced recently that it would close one of two 200,000 tonne/year ethylene lines at Priolo, Italy, by the end of 2012.

Company

Location

Date

Duration

Fina Antwerp Olefins

NC3 Antwerp, Belgium

March-April*

Six weeks

Repsol

Sines. Portugal

May*

Four weeks

LyondellBasell

Wesseling 6, Germany

August-October*

Six weeks

Naphtachimie

Lavera, France

August-October*

Six weeks

ExxonMobil

Mossmorran, UK

August*

Two weeks

Borealis

Porvoo, Finland

August-October*

Six weeks

*not confirmed

Pivotal to the supply/demand balance for propylene is the expected heavy refinery turnaround schedule in the US, as well as refinery maintenance in Europe, which could open up some arbitrage opportunities from Europe to the Americas and take some volumes out of Europe.

By contrast, ongoing market talk about the restart of the Libyan cracker, possibly next year, could increase merchant propylene availability.

Despite this, producers stressed that there is a definite need to increase olefin prices as soon as possible, because of ongoing pressure on cracker economics, which has been exacerbated by the uptrend in naphtha costs and the weakening of the euro against the US dollar.

Sellers said there is no option but to increase prices, as feedstocks and unfavourable exchange rate conditions have meant that current olefin prices are unsustainable. Cracker operators said if prices do not move up, there will be no point to produce at such low levels.

Last week, the European ethylene contract price for January was agreed up by €40/tonne at €1,120/tonne FD (free delivered) NWE (northwest Europe), reflecting firmer feedstocks and expectations of improved demand. Meanwhile, the European propylene contract price for January was fully confirmed up by €20/tonne at €1,015/tonne FD NWE. Sellers have voiced their discontent at the level of increase, which they considered insufficient. Producers are targeting increases, while consumers hope to limit these increases or secure a rollover.

Buyers are determined to restore downstream competitiveness with other regions, which became more difficult during the second half of 2011 as European contract prices remained higher than the other regions. The recent weakening of the euro against the US dollar and some price reductions in Europe helped to narrow the gap with the other regions, but buyers said the proposed increase in European olefin prices would counteract this, particularly if prices in the other regions remain the same or lower.

Propylene spot price levels in particular have continued to trade at a significant discount to contract levels during the second half of 2011, following some significant price falls in mid-2011, as demand became more subdued. In the first half of December, spot prices were assessed from €600850/tonne ($779-1,104/tonne) FD NWE, depending on grade and region, while the December propylene contract price is at €995/tonne FD NWE.

Due to competitive spot pricing, some players suggest there may be some increased flexibility between contract and spot levels in 2012, with less contract exposure and greater spot activity as players try to benefit from this, at least in the early part of 2012, which could tighten up spot supply and exert some upward price pressure if crackers continue to run at reduced rates.

However, others question whether there will be any significant difference between contract and spot activity, because it is particularly risky for propylene, with its low yield compared with ethylene, if the market turns and tightens.

Ethylene cracker margins based on naphtha feedstock have hit the lowest levels since December 2010, according to ICIS data during the first half of December 2011. In the week ending on 9 December, the ethylene cracker margin was pegged at €285/tonne.  

The average 2011 contract margin to date is around 30% higher than for the whole of 2010, but because of upstream volatility, sources do not expect as much of an improvement for 2012.

A third producer said that “if demand improves, olefin prices are expected to slightly increase and take us back to healthy margins, but not the rocket high levels seen in 1H of 2011”, barring any unforeseen significant developments on crude oil and naphtha.

Some buying and selling sources agreed that it is not good for the sustainability of the whole value chain to have margins at such low levels. Some said that the price reductions over recent months did not help to stimulate any additional demand. 

The general expectation is that 2012 is likely to be an inverse reflection of the “two-halves” market seen in 2011, when feedstock and olefin prices were high, but margins throughout the value chain were good, because of tight supply and good market activity.

“It [2012] will not be an easy year, less good than the first half of 2011, but better than the second half,” said a fourth producer.

In May 2011, both ethylene and propylene contract prices hit record highs, of €1,230/tonne and €1,245/tonne FD NWE respectively. Propylene contract prices were higher than those for ethylene for a period of four months, from April to July, an historical first which highlights the structural changes resulting from new gas-based capacities.

However, the market situation changed for the worse in the second half of the year, as economic uncertainty gripped the market, and both ethylene and propylene prices have been under downward price pressure.

Next year will begin with high upstream crude and naphtha costs and low profitability, which players said needs to be addressed urgently by passing on increases throughout the chain, with the hope that the second half of 2012 will shape up better than is expected for the first half of the year.   

The olefins consumer said: “There was a high-speed driving period in the first half of 2011 and then there is the sudden braking and now it [the market] can accelerate at a sustainable speed, not as high as before or as low as now.”

It remains difficult to make any calls because of the underlying uncertainty. However, several sources have said that the industry should be pleased with the level of discipline seen among players, reacting to low demand by cutting operating rates sooner rather than later, using the lessons learnt in the 20082009 crisis.

One key olefins trader said of 2011: “It has been a crazy year, the world is in a mess and the [market] pendulum is swinging, and we are struggling to find a balance.”

Players are hopeful that there will at least be some progress towards achieving this balance in 2012.

($1 = €0.77)

For more on ethylene and propylene visit ICIS chemical intelligence


By: Heidi Finch
+44 20 8652 3214



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