INSIGHT: Operating environment is improving, prices pushed higher

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

By Nigel Davis

LONDON (ICIS)--Business in Germany is more buoyant than at the end of last year and confidence has improved in both manufacturing and construction, according to recent surveys.

Upstream petrochemical and polymers players are certainly more confident at the end of January than they were towards the end of last year.

Pre-buying ahead of expected price increases is a feature of most markets as well as some residual re-stocking but, increasingly, real demand increases are feeding back up the main petrochemical value chains.

Producers have worked through a difficult soft patch and one that has been overshadowed by uncertainty. Margins were squeezed in the fourth quarter of 2011 and volumes sharply lower. Companies now want to regain the lost ground and put some more cash in the bank – as a cushion against tougher times again later in the year, perhaps.

Buyers are under pressure in numerous markets as producers apply upward price pressure.

Ethylene and propylene sellers have been targeting a three-digit price increase for contracts in February, for instance. The European ethylene contract settled up €99/tonne ($130/tonne) at €1,219/tonne on Friday. February propylene settled up €90/tonne at €1,105/tonne. Butadiene in Europe was agreed up €235/tonne at €1,935/tonne.

Producers cracking naphtha have been under severe pressure, particularly as co-product margins (margins on products such as propylene and butadiene) have shrunk. Cracker operating rates slumped in the final months of 2010 but some have been worked back up to between 85% and 90%.

Demand is better than expected but everyone is cautious. The underlying recovery is weak and much of the improvement comes from re-stocking and pre-buying ahead of expected cost-driven feedstock price increases.

Spot prices for some products have been moving up globally, encouraging the upward march in Europe. And the weaker euro has made derivatives exports more attractive.

But there is clearly a balance to be struck between pushing too high now and damaging competitiveness rather than taking less to gain more in the longer term.

Those concerns, however, appear to have been mitigated by the push higher on olefins prices in the US. While so much attention is being paid to Europe and the eurozone crisis, the US is growing at a much healthier pace and chemicals demand is relatively robust.

Barring more risks coming out of Europe, the US economy could grow by between 2% and 3% this year, US Secretary of State for the Treasury, Timothy Geithner, told the World Economic Forum meeting in Davos, Switzerland on Friday.

“But we still face tremendous challenges,” he said. “We’re still repairing the damage caused by the devastating financial crisis. Unemployment is still very high, housing and construction are still very weak, people still have too much debt.”

Spot polymer prices in Europe have risen from very low levels in December and the upward pressure on contract prices has increased. However, it is far from clear whether the upward price pressure is being driven by real demand or supply tightness brought about by pre-buying.

Meanwhile, the impact of the turn down in the fourth quarter is becoming more widely apparent.

“The trading environment in Q4, 2011 was challenging with global economic and political uncertainties impacting demand in a number of sectors,” Switzerland-headquartered chemicals company INEOS has said.

“Businesses such as Nitriles and Phenol were directly impacted by the government imposed fiscal restraint in China which led to a decline in Asian demand and declining product prices,” it added.

“Problems in the eurozone countries affected O&P [Olefins & Polymers] Europe with many buyers seeking to reduce stockholdings, leading to weakening demand and reduced operating rates. Trading conditions were better in North America and O&P NA [North America] margins remained above mid-cycle. Oxide and Oligomers also held up well in the quarter.”

INEOS said it has continued to focus on cash management and liquidity: hardly surprising in such a difficult and uncertain trading environment.

Its fourth quarter 2011 earnings before interest, tax, depreciation and amortisation (EBITDA) dropped to €220m from €223m the year before. The numbers are for the businesses not including Refining which was put into a joint venture in July 2011.

But INEOS did report EBITDA of €371m for the third quarter of the year and €538m for the second quarter. It said on Thursday that it had cash balances of €581m at the end of the fourth quarter of 2011 and €293m of available credit.

The trading environment at the start of 2012 is much improved from the fourth quarter of 2011, the company added.

“The four-week moving average of weekly order volumes in early January is the highest it has been over the last five years,” it said.

“In North America, O&P NA margins have benefitted from polyethylene prices increasing (for the first time in December since 1985), ethane prices significantly declining and from a tightening supply position caused by a heavy plant turnaround season in the industry.

“In O&P Europe all plants are running well after coming back from Q4 turnarounds and off take has picked up after heavy destocking at the year end. Substantial sales price increases are being targeted for February.”

Trading conditions for its main intermediates had improved, it added.

“In Chemical Intermediates all four major businesses have encountered improved trading conditions: Phenol sales are 20% higher than December and Nitriles’ plant operating rates have risen from around 60% in Q4 to 90% in January.”

($1 = €0.76)

Read Paul Hodges Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog


By: Nigel Davis
+44 20 8652 3214



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