25 May 2012 13:14 [Source: ICIS news]
By Heidi Finch
LONDON (ICIS)--A significant reduction in the European June propylene contract price is widely expected on the back of lower naphtha feedstock and soft market conditions but the magnitude of any decrease is being strongly debated, market players said on Friday.
Propylene supply has lengthened since April with demand softening, particularly in the main downstream polymer sector, which coincided with the arrival of imports from Asia at a similar time.
In addition, a spate of derivative production constraints over the last few months, good cracker output and only a very modest cracker maintenance schedule in Europe has meant that propylene supply has remained plentiful.
Cracker operators have also been reluctant to cut back rates, based on improved margins driven by feedstock relief over the last few months.
Some manufacturers have trimmed operating rates over the past month in an attempt to manage the length in the market. Current rates are either side of 80%, although some players suggest that more widespread and significant action may be necessary if demand does not improve, especially as arbitrage opportunities are not currently workable.
In the week ending 18 May, contract ethylene margins (naphtha) jumped by €89/tonne ($111/tonne) to their highest since December 2008 on falling naphtha feedstock costs.
In the same period, naphtha prices dropped by $53/tonne, the benefit of which was limited by a 1.7% strengthening of the dollar resulting in euro-based feedstock costs falling by 4.2%, according to ICIS margin data.
Demand has been lacklustre, based on underlying economic uncertainty and the expectation of substantial price reductions, which prevented players from buying anything more than necessary to avoid having higher-priced stocks.
Both buyers and sellers are hopeful that a downward price correction could help to kick-start demand, provided it is a significant enough adjustment.
Buying sources are pushing for three-digit drops of €100-200/tonne based on slow market conditions and for the sake of derivative competitiveness – with Europe being the most expensive region.
One buyer is concerned that it will lose export opportunities to the Americas if there is not a significant enough downward correction in Europe, particularly in view of the downward trend in propylene values in the US.
The same source said that a drop of €200/tonne would be necessary to regain competitiveness but added that a compromise of €120-130/tonne would be likely.
Producers, however, are trying to limit price reductions on the June monthly contract price to two digits, in view of heightened volatility in the upstream market and the possibility that naphtha costs could rebound again. They consider hikes in excess of €100/tonne unacceptable.
Some sellers, however, are talking of a two stage price decrease, first in June and then again in July. Other players are keen to avoid this though, considering that it will only continue to dampen buying activity as customers will hold back, expecting lower prices in July.
One trader said: “The [expected monthly contract price] reduction in June needs to be significant enough to build confidence downstream that this is it. If it is only a modest decrease in June, buyers will refrain from purchasing as much as possible until they get the feeling it [the price] has reached its bottom.”
European spot prices have been coming down significantly over the last few months on lengthy supply and lack of spot demand. Polymer grade propylene (PGP) has trended downwards since the first half of March.
On 9 March, spot PGP prices were assessed at €1,195-1,210/tonne CIF (cost, insurance and freight) NWE (northwest Europe) and had fallen by €190-215/tonne by 18 May, according to ICIS price history.
Spot prices are already trading at a significant discount to the May contract price level, which also puts more pressure on the June contract to move down substantially.
($1 = €.80)
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