INSIGHT: European producers make gains in cost driven upturn

02 March 2012 16:01  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Petrochemical producers are having some success in passing on higher oil-based feedstock costs in the early part of the year.

There is a lot of ground to make up after the difficult second half of 2011 and the poor fourth quarter. But the 9% rise in ethylene (C2) prices in Europe agreed this week, and the uptick for the other monomers, will help lift producer margins. And some progress is being made downstream as intermediates and polymers makers attempt to pass on their own higher feedstock costs.

Some ethylene producers were aiming for a three-digit ethylene price increase in March, in a market which has been described as being “under financial stress”. Ethylene consumers, however, say that the market is still fragile against the backdrop of deep macroeconomic uncertainties.

The European ethylene contract for March was agreed at a record high of €1,305/tonne, up €86/tonne from February while March propylene (C3) was confirmed up €90/tonne at €1,195/tonne and March butadiene (BD) up €250/tonne at €2,185/tonne.

The rise in naphtha prices in February put additional strain on producers still reeling from the slump at the end of 2011 and is being pushed hard through the different petrochemical value chains.

Polyethylene (PE) prices in Europe look as though they are approaching record highs following the olefins settlements while styrene (SM) prices are rising, not on any increase in benzene costs, however, but on higher ethylene.

The polystyrene (PS) market remains weak but there appears to be sufficient demand for polyethylene and polypropylene (PP) for price increases to stick.

So far this year, PE prices in Europe have risen by 20% and proposed increases would take the differential to more than 30%. Material is relatively short and higher prices will attract imports so there is some tension regarding April and beyond.

Pre-buying ahead of further price increases is a feature of the market as inventories have refilled. The European situation contrasts with that in Asia where buying has been flat and prices have languished after the Lunar New Year holidays.

There is, of course, speculation as to how long the upward momentum in Europe can continue. Most expect it to run out of steam by May, sources have suggested to ICIS.

Both buyers and sellers look back to 2011 when prices rose in the first quarter before falling back through the rest of the year.

The pattern of demand in Europe, however, in 2012, will be different given the subdued economic outlook. In February the European Commission forecast that there would be no growth in the EU economy this year and a contraction in the eurozone.

Macroeconomic tensions, however, have eased in the past few days.

The European Central Bank (ECB) this week started pumping even more money into Europe’s beleaguered banking sector as it released a further €530bn ($707bn) of low-interest loans. It has provided funds of more than €1,000bn in two tranches – in December 2011 and February 2012.

The additional funds have averted the possibility of a severe credit crunch and additional recessionary pressure across the Economic and Monetary Union (EMU or the eurozone) and have “warmed up” public funding markets, ratings agency Standard & Poor’s said this week.

And, on Friday, EU leaders signed a treaty designed to enforce budget discipline, the action reinforcing the steps already taken to deal with the sovereign debt crisis.

In petrochemicals, nevertheless, the pressure from higher cost oil is immense. Prices in the PE market, for instance, are said to reflect the real cost of oil which, at around $125/bbl, is higher than in July 2008 in euro terms.

The weaker euro has played havoc with producer margins in Europe. Crude hit a peak of $147/bbl in August 2008.

As the chart shows, the ICIS petrochemical index (IPEX) closely follows crude, although the lack of demand has eaten away at prices since around May last year. The first quarter 2012 price upturn could still be largely cost driven.

Europe petchem prices and Brent crude

(Additional reporting by Nel Weddle, Linda Naylor and Heidi Finch)

($1 = €0.75)

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By: Nigel Davis
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