Corrected: Europe May ethylene, propylene contracts key for olefin derivatives

20 April 2012 13:52  [Source: ICIS news]

Correction: In the ICIS story headlined "Europe May ethylene, propylene contracts key for olefin derivatives" dated 20 April 2012, please read in the 11th paragraph ...peak of the markets for 2012... instead of ...peak of the markets for 2011.... A corrected story follows.

By Nel Weddle

LONDON (ICIS)--The outcome of the European ethylene and propylene contract price (CP) settlements for May are considered pivotal to the health of the olefins derivatives markets, sources said on Friday

Last week, speculation was building that softening derivative demand, particularly that for key olefins derivatives polyethylene (PE) and polypropylene (PP), would weigh on negotiations

PE, and to a lesser extent PP, have been faced with strong competition from cheaper imports encroaching on the European volumes’ usual outlets and displacing northwest Europe (NWE) tonnes.

Some sources add that the export of  non-polymer derivatives, which have enjoyed healthy export opportunities over the past couple of years, has also now dried up, a development they describe as “worrying”.

Record-high ethylene and propylene CPs have made Europe a very attractive destination, both for ethylene and propylene as well as for PE and PP.

The drop in crude and naphtha this week has led to a heightened perception that the contract prices could slip, bucking a four-month uptrend. At the very least, buyers are hesitating before committing to fresh business, preferring to reduce inventory levels in the hope they can buy cheaper next time.

However, while most sources agree that demand currently looks soft, several cautioned against bearish sentiment overwhelming the true fundamentals of the markets.

“[We] have fears that we talk ourselves into a poor market, everyone is cautious,” a trader said.

“I am not sure whether [we are seeing a] fundamental reduction in demand or just the expectation that the contract price will go down,” a consumer said, adding: “There is still a big question mark.”

But, another consumer said:  “The overall picture is that we struggle with the same problems as every other [derivative] chain.”

The consensus is that the peak of the markets for 2012 is likely to have been and gone. From the macroeconomic point of view, automotive and construction sectors remain poor.

A couple of sources said they were anticipating either a rollover or a “minor decrease” for both ethylene and propylene. A third source said it expected a decrease of €30/tonne ($39/tonne) for both products.

However, it will be difficult to achieve a significant decrease on the contract price, even though people might be targeting one, some sources said, as cracker margins - albeit much improved since the start of the year - are still far below the average margin for the same period in 2011.

“There is still pressure in the system where historical cracker margins are concerned,” a producer said.

One or two sources suggested that “inventory valuation”, as well as a wish for stabilisation, could influence some contract positions as certain players seek to limit losses downstream.

If the soft demand was the result of a more fundamental shift in demand patterns, then producers would have no choice but to reduce cracker operating rates.

Discussions will get underway next week. April ethylene settled at €1,345/tonne FD (free delivered) NWE and propylene at €1,245/tonne FD NWE.

($1 = €0.76)

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By: Nel Weddle
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