13 January 2012 12:29 [Source: ICIS news]
LONDON (ICIS)--European ethylene (C2) producers are targeting a significant increase for the February contract on the back of high upstream costs, poor foreign exchange rates and improved demand, market sources said on Friday.
Cracker operators said that current cracker margins are untenable and unsustainable and a sizable increase will be sought, not only to recover margin lost since the January contract settlement, but also to build in a buffer to protect against any further upswing.
A producer said: “We are losing money, we need [an increase in] three digits for February.”
The January contract settled at €1,120/tonne ($1,436/tonne) FD (free delivered) NWE (northwest Europe), up by €40/tonne from December.
“[We need] an important increase in February to cover any unexpected increase in crude and naphtha,” said a second producer.
The general view among producers was that bullish factors impacting on the crude and naphtha markets outweighed any bearish factors such as uncertainties over a weakening economy, and are likely to continue to do so.
Better-than-expected demand in January, with one producer describing its nominations as surpassing expectations, has led to a handful of producers ramping rates back up to 90% or above.
Others said that they remained reduced because they are restricted by poor cracker margins and at the same time they would prefer to wait and see how demand pans out in February, when customers are expected to have restocked and true levels of demand will emerge.
“It doesn't make sense to do so [ramp up rates] as it's not clear whether this is genuine demand or not,” said a third producer.
Ethylene derivatives are performing better than those for propylene, sources said, suggesting that the mild European winter so far has been beneficial to those derivatives with applications in the construction sector – namely polyvinyl chloride (PVC) and polyethylene (PE) pipes.
However, there is the also the suggestion that some of the better-than-expected demand could be ascribed to pre-buying strategies, since expectations of an increase in the February contract started circulating in the market quite early, on the return from the Christmas and New Year break.
Also setting the scene for the proposed contract price increases is news of some spot sales – reportedly from a producer to a producer and an integrated consumer in the mid-€1,000s/tonne CIF (cost, insurance and freight) NWE. CIF coastal prices were last in four-digit territory at the end of September.
Producers have been loath to increase rates but have still needed to buy volumes in order to cover the improved demand.
From the consuming side, derivative producers are fearful of the magnitude of the increases producers are likely to try and impose.
“I am worrying about naphtha,” said one major consumer, adding: “There is a big cost pressure on cracker margins, but on our margins also.”
“We can only hope that feedstock will give us some relief [by the time the contract discussions start in earnest].”
A second major consumer warned about an ongoing lack of competitiveness in the global marketplace.
It said “suppliers are forcing us to import our derivatives from cheaper areas”, which meant that it “won’t be able to lift the volumes we would want to".
The consumer added that it hoped business would pick up in February and March, but an increase in the contract would slow this activity,
“It’s very short thinking. If they are not careful they will overdo it."
($1 = €0.78)
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