Europe propylene sellers seek large Feb hikes on higher feedstock

23 January 2012 19:59  [Source: ICIS news]

LONDON (ICIS)--European propylene producers are seeking significant increases for the February contract price because of higher feedstock costs, but buyers remain wary of the hike amid fragile downstream demand, market sources said on Monday.

The substantial nature of the proposed increase for February was driven by the recent spike in upstream naphtha and crude costs since the last olefins settlement, which has been further exacerbated by the weakness of the euro against the US dollar.

Sellers have made it clear that they have no option but to pass on a significant price hike in February.

The European propylene contract price in January was at €1,015/tonne ($1,301/tonne) FD (free delivered) NWE (northwest Europe), up by €20/tonne from the previous month.

On 20 December, naphtha traded on average at $878/tonne CIF (cost insurance freight)  NWE, but has since moved up to $944/tonne on average, according to ICIS.

Olefins producers stressed that cracker margins are at unacceptably low levels, with one producer saying that “nobody has deep enough pockets to run at this level".

Producers said a price hike of around €100/tonne for propylene, as well as possibly higher increases for the other olefins, would make cracker margins “acceptable again, but would certainly not make them sustainable".

Ethylene cracker margins were at €189/tonne on 20 January, significantly down from €386/tonne a year ago.

The small cracker margins so far this year have been reinforced by the fact that overall cracker utilisation in Europe is still low.

While cracker operating rates have increased in some cases during January, in line with higher demand, particularly for ethylene, average cracker run rates are at about 80%.

The average cracker operating rate in December 2011 was about 70%. 

One cracker operator said it has been forced to ramp up its output to meet higher olefin contract requirements in January, but added it regrets doing so from an economic perspective because of the big jump in feedstock pressure.

Sellers stressed that there is no economic incentive to produce anything above contract requirements.

One producer said the high upstream costs are affecting cracker margins on a global basis, and Europe has been particularly affected because of the unfavourable exchange rate.

The same source stressed that there will be serious consequences for olefins production if significant price hikes are not achieved in the February olefin contract discussions.

Sellers said spot prices have already been moving upwards in January and, even though spot prices still remain below contract prices, the gap between the two has narrowed during January.  

On 23 December, European polymer grade propylene (PGP) spot prices were assessed at €800-850/tonne CIF NWE. Prices then increased to €930-950/tonne CIF by 20 January.

Over the same period, inland PGP spot prices moved up by €7080/tonne to €900920/tonne FD NWE.

The uptrend in spot pricing has been driven by the intensified cost pressure and some renewed buying activity.

Buyers said they were not surprised by the level of increases being targeted for the propylene contract price in February from a cost and exchange-rate perspective, but they are concerned that a steep uptrend in contract prices was likely to stifle downstream demand.

While olefins consumption has picked up in January versus December, some players are still not convinced that this is a fundamental improvement or just a temporary restocking or pre-buying in anticipation of expected price hikes.

However, one producer suggested that firm discipline on the sell-side was likely to have limited any possible pre-buying effect on demand in February.

Some consumers said they consider that price increases of €4070/tonne would be realistic for propylene in February, but they suggest that anything above this would be difficult to digest downstream.

One consumer was particularly mindful of export possibilities for propylene derivatives.

While the weak euro against the strong US dollar makes European derivative exports more competitive from an exchange-rate perspective, the consumer said a steep price increase will not help European competitiveness against other regions.

The same source said while spot prices have been moving up in Asia and the US, and an increase of €6070/tonne on European contracts may bring prices closer with other regions, a three-digit increase could price Europe out of the global market.

Olefin sellers, however, suggest that increases of €4070/tonne for propylene would be insufficient to restore profitability at cracker level.

One net consumer said it expects to see an increase of at least €7080/tonne, saying it will help to increase prices and improve much-needed margins at the cracker level.

The source added “if demand is affected, so be it, if we can get higher prices”.

Some buying and selling sources said demand will likely remain normal to good in February, with no slowdown when compared with January. A few buyers, however, said there is still an underlying weakness in demand because of the general economic uncertainty.

European propylene supply remains largely balanced, although prompt, particularly at the coast remains limited, following recent production problems, along with reduced capacity.

A few buyers said there has been some residual length in the market, because of recent derivative problems. Other players said any length in the inland market has now been removed, following the resolution of recent derivative production constraints and problems at one main inland cracker.

While olefin producers are targeting significant increases across the olefin product range, there is some expectation that the increase for propylene may be slightly lower than for the other olefin products, as supply for the other olefins is more limited when compared with propylene.

However, other sources suggest that there is unlikely to be any significant difference because they are all affected by the same feedstock pressure, with one source stating that an “even distribution of a difficult situation” is necessary.

($1= €0.78)

For more on propylene visit ICIS chemical intelligence

By: Heidi Finch
+44 20 8652 3214

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