INSIGHT: Europe casts shadow over record US ethylene margins

13 April 2012 16:08  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--US ethylene and polyethylene (PE) producers should get a boost in profitability in the first-quarter earnings season and beyond on record margins from ethane feedstock. However, fears about another European debt crisis are casting a shadow over the favourable local margin dynamics.

On 9 April, Laurence Alexander, analyst at US-based investment bank Jefferies & Co., raised his earnings per share estimates on US producer LyondellBasell – by $0.12, to $1.18 for the first quarter and by $0.20, to $4.70 for the whole of 2012 – to reflect olefins margin trends.

The analyst also increased his earnings per share estimates on Dow Chemical – by $0.07, to $0.61 for the first quarter and by $0.15, to $2.55 for the full year – also partly on higher ethylene chain margins.

However, Alexander is cautious about the demand and margin outlooks.

“Our relative caution is based on both risks to end market demand (austerity initiatives by various governments, rising costs for raw materials and transportation fuels) and more specifically, that US ethane-based margins could compress into mid-year,” he said in a research report.

US ethylene margins based on ethane feedstock have surged in the first quarter, bolstered by a heavy cracker turnaround schedule. This has both depressed ethane prices and put a floor under ethylene prices.

Meanwhile, US natural gas prices dipped below $2/MMBtu in the first time in over a decade on 11 April.

US ethylene margins using ethane feedstock were assessed at a record 60.58 cents/lb ($1,336/tonne, €1,015/tonne) the week ended April 6, up from 54.80 cents/lb a week earlier.

Spot ethylene surged to 75.125 cents/lb, the highest spot transaction recorded on the ICIS database for delivery on the Williams pipeline system in the US Gulf coast. Meanwhile, ethane prices fell by nearly 10% to 47 cents/gal, pressured by weaker demand.

But overshadowing the robust US margins have been renewed fears about another shock to the European financial system – this time focusing on Spain.

Spanish bond yields surged higher on 10 April, sparking doubts about whether the fourth-largest country in the eurozone will be able to manage its heavy debt load.

Cyclical stocks were slammed across the board in the weeks leading up to 11 April, before a rebounding through mid-afternoon trading in the US on 12 April.

Even those in the US chemical sector enjoying wider margins have been hit hard – and rightfully so. Another major implosion in Europe’s financial sector will not leave these producers unscathed.

Shares of US-based Dow Chemical were trading at $32.74 in mid-afternoon trading on 12 April, up $0.87, or 2.7% for the day. But shares are more than 22% off their 52-week high of $42.23 reached in May 2011. The stock traded at $36 as recently as 27 March.

($1 = €0.76)

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By: Joseph Chang
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