INSIGHT: Petrochemical prices and margins suffer as crude falls

14 May 2012 16:53  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Global upstream petrochemical markets are being hit by the lower oil price and still uncertain recovery. The news from Asia has not been good, with olefins and polymer prices falling and margins under intense pressure. Spot ethylene margins in Europe are much lower, while benzene appears to be losing its resilience to the downturn.

The lower oil price says it all. Higher prices earlier this year have proved to be unsustainable, particularly in such a weak macroeconomic environment. The 2012 price gains have evaporated. Brent crude is $12/bbl lower today than it was a few months ago.

Europe’s continued economic weakness and the overarching eurozone crisis weigh heavily on the global picture and are stifling the recovery. China, mired in a political sea change, is not delivering the growth that has buoyed the fortunes of chemical producers since the 2008–2009 slump. The country’s year-on-year industrial production gain in April, for instance, was the lowest in three years and well down on March

Polyethylene (PE) prices were down sharply in Asia last week, and prices for other ethylene derivatives were lower. Cracker operators in the region have cut back as ethylene and co-product margins have weakened.

Crude futures in Asia on Monday were also sharply lower and polyethylene futures, traded on the Dalian Commodity Exchange, were down.

Falling crude and naphtha expose petrochemical product prices at the wrong time. Producers have been trying to recoup at least some of the margin lost to higher raw material and energy prices for much of this year. Their products seemed to be finding ready markets, with buyers keen to restock and buy ahead of further price increases.

The high price story, however, is hard to tell in a weakened crude price environment and one that reflects global macroeconomic sentiment. A slow May does the sector no favours and a renewed recovery in June looks less and less likely.

The world’s emerging markets are, according to the Organisation for Economic Co-operation and Development (OECD), giving stronger positive economic signals and there is some evidence of regained momentum in OECD member nations themselves. But the EU’s industrial production figures for March, released on Monday, were miserable. The chemical production figures were not much better.

The latest ICIS ethylene margin data show how lower naphtha costs are playing out in Europe and Asia.

Ethylene margins in northeast Asia, based on naphtha feed, plummeted last week, falling on a general downturn in prices, but were offset by lower naphtha costs. Ethylene prices fell by $70/tonne and co-product credits by 5.3%. A steeper fall in co-product propylene and butadiene (BD) prices helped push naphtha-feed ethylene margins in southeast Asia down further.

By contrast, naphtha-feed ethylene margins in Europe, based on contract product prices, have been higher in May than in April and benefited last week from lower naphtha costs, offset by a stronger US dollar.

By contrast, spot margins based on naphtha feed plunged by €143/tonne, mainly on a $100/tonne drop in spot ethylene prices. Spot co-product credits slumped by almost 5% as the prices of the major derivatives fell. Tellingly, contract margins had the largest advantage over spot margins since October 2011.

In the US, spot ethylene margins based on ethane and naphtha feed each dropped to their lowest level since January in what has been called a generally tumbling spot market.

And on Monday it was the turn of benzene to reflect the more bearish sentiment in Asia and in Europe’s petrochemical markets.

The downturn took hold in the US on Friday and spread to Asia on Monday. Europe’s more robust supply and demand situation might have been expected to limit the fall but prices dropped nevertheless. Sharply lower styrene prices are expected.

($1 = €0.77)

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By: Nigel Davis
+44 20 8652 3214



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