INSIGHT: Cracker margin squeeze in Q4 but a good year for producers

09 January 2012 16:43  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The data are giving some idea of how the slowdown in petrochemicals played out in the fourth quarter. As demand fell away, prices came under pressure and margins shrank. The knock-on effect will be felt through the first quarter of 2012.

But there are stirrings in a number of important markets. European players are only just returning from their winter breaks, although the talk has been of stronger volumes and potentially higher prices.

At the cracker, operating rates slumped in Europe and elsewhere in the final months of 2011. Producers were reacting to destocking along multiple supply chains, while their customers were facing weaker consumer demand. Polyolefins, particularly, were taking the strain.

Sources in Europe estimated cracker operating rates of around 65% in the final weeks of the year. Downstream, some low density polyethylene (LDPE) plants had been shut for weeks. Polypropylene (PP) was reported tight, but only because of significant production cutbacks.

Finely tuned production volumes in the primary petrochemical markets have underpinned prices in what has continued to be a difficult period, overshadowed by global but predominantly European financial insecurity. The focus on the eurozone debt crisis and its potential impact has drawn attention away from real markets, some believe. “The first quarter won’t be easy, it won’t be great and it won’t be bad. A lot depends on psychology,” one olefins consumer in Europe said last month.

Little has changed yet in January compared with December although sentiment has improved: given a New Year lift, perhaps.

Petrochemical producers clearly expect restocking and wonder how their customers can run so low. But they face a harsh margins squeeze as oil and petrochemical feedstock prices stay high.

The hope is that demand in January will be better than it was in December. February could be better still as demand in Asia returns following the Lunar New Year holiday.

There is a great deal of ground to be made up, however.

Ethylene variable margins (margins not taking into account fixed costs) for producers in Asia using naphtha as a feedstock remained weak at the start of 2012, ICIS reported on Monday. Northeast Asia ethylene margins were barely positive while margins for naphtha-based producers in southeast Asia had turned negative.

Local naphtha prices were higher while co-product credits – the value liquids-based cracker operators gain from the sale of ethylene co-products such as propylene, butadiene (BD) and aromatics – were lower.

In the fourth quarter, cracker margins in northeast Asia were their lowest since the first quarter of 2009 and that performance helped drag down the annual average. Northeast Asia cracker margins in 2011 were down by 30% compared with 2010.

The picture in Europe has not looked as bad while contract prices, in sharp contrast to spot numbers, have held up.

Annual average 2011 contract naphtha-based ethylene margins were 26% higher year on year and the highest since 2008. Margins for the first week in January, however, were sharply lower on higher naphtha costs and the weakness of the euro against the US dollar and despite somewhat higher ethylene and co-product prices.

The balance between supply and demand that is being sought by cracker operators in Europe at the start of 2012 is apparent in the comparisons. The data as they stand, however, do not show how volumes were hit towards the end of last year. A better understanding of the volume downturn will be had when the major players start reporting their fourth-quarter and full-year 2011 results

Full-year spot ethylene margins in Europe were up by 16% on 2010 and spot margins in the first week of 2012 recovered from miserable levels at the end of 2011. The spot ethylene and co-product prices had begun to reflect higher naphtha feedstock costs.

While cracker operators and others in Europe remain under pressure and are playing a fine balancing game running into 2012, US producers continue to benefit from the relatively low ethane feedstock price.

Those cracking ethane gas were able to seize the advantage in 2011 and operating rates remained relatively high. Contract margins fell at the beginning of the third quarter, while gains were made towards the end of the year.

Ethane-based ethylene contract margins in North America were up 14% year-on-year in 2011 and some of the best since 2000, the ICIS data show. The turn of the year has not looked great, however, as the weekly margin has fallen on increased ethane feedstock costs.

Those cracking ethane to produce ethylene in 2011 had a close to 9 cents/lb ($198/tonne) margin premium over naphtha-based producers. Naphtha contract margins for the year, however, were still 25% higher than in 2010 and the highest since 2006.

($1 = €0.79)

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By: Nigel Davis
+44 20 8652 3214

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