25 May 2012 11:23 [Source: ICIS news]
By Nel Weddle
LONDON (ICIS)--June ethylene contract price (CP) negotiations are underway and with a downward direction clear the main issue is the magnitude of the decrease, market sources said on Friday.
Reduced demand and weak upstream crude oil and naphtha over the past few weeks have fuelled widespread speculation that the June contract price would drop significantly.
Activity in the ethylene and ethylene derivatives markets throughout May have stagnated as a result.
The May contract price settled at €1,325/tonne ($1,656/tonne) FD (free delivered) NWE (northwest Europe).
The decrease of just €20/tonne from April’s record-high contract price was derided by several players at the time of the settlement as being "technically a rollover" and therefore nowhere near enough to support the needs of the derivative producers whose businesses have been impacted because of their lack of competitiveness in the global market.
Sources said that there was a wide range of contract price ideas.
"The gap [between producers and consumers] is very big - the largest that I can remember," a source on the buying side said.
Consumers are positioning themselves from minus €90/tonne to minus €200/tonne, with minus €120-150/tonne described as a reasonable settlement by the majority of consumers.
"Crude oil and naphtha are where they were in December last year and ethylene remains much higher," a major consumer said. It added that producers were "stalling" the downward correction that is needed.
"Minus €200/tonne is not unreasonable but maybe a bit extreme. We were hoping for good demand in the second quarter but this has not materialised. Why? Because we have been priced out of the market," the major consumer added, saying it was doing as much as it could to avoid buying olefins in Europe and was importing derivatives from the US.
"We have been pushed into a corner for the past few months," it said.
A second consumer said: "There is a lack of demand, a lack of [derivative] export this is why there has to be a significant decrease [for June CP]."
Producers divulged little in the way of actual numbers, but a couple said that a two-digit decrease would be the most appropriate outcome.
"The price trend is clear," a major producer agreed.
Its own view was that as long as there was good consensus from a broad spectrum of ethylene derivatives, a three-digit decrease as a one-time only correction might be acceptable.
However, another producer disagreed: “Asking for minus €120-150/tonne is not a clever position, it would lead to a crash downstream, we should not rush to put cracker margins in jeopardy again.
"We will see an important decrease in June, but two-digits is still enough," it said.
That producer and a couple of others reiterated that year-to-date cracker margins, despite being at a 41-month high, are still below that for 2011 and therefore a dramatic adjustment to the contract price next month would not be workable.
But a source said this argument was flawed: "To say we had the wrong price yesterday so we should have the wrong price tomorrow is crazy."Also complicating matters and proving divisive is the question of whether a significant "one-off" adjustment should be made, or whether a more step-by-step approach would be more workable for all.
"We did discuss whether it would be effective to go for a [big] decrease. It’s a good argument but we don’t feel it will stimulate demand," a third producer said.
However, a third major consumer said: "It's good to have a reasonable adjustment and not something in-between," adding that if downstream consumers expected a further adjustment in July, this would again lead to hand-to-mouth buying activity.
Many sources echoed this view and while some said that there was "no guarantee" that a sharp drop would give the European derivatives market a much-needed boost, they added that the markets had reached a point where this was the "only option."
"If the adjustment is too small, we will not see the market picking up – Europe is very expensive," a trader said.
"Until the contract price is corrected the gap between spot and contract prices will increase," said the second consumer, adding that this will continue to shut out European ethylene and ethylene derivative volumes.
"The overriding sentiment is that if it doesn't drop very heavily we will see another May, that is terrible demand," an industry observer said.
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