Petrochemicals:Slack demand and weakness upstream see ethylene contraction

04 June 2012 00:00  [Source: ICB]

European olefin suffers June settlement slide, but decline is not as substantial as some consumers had imagined

After much speculation about the magnitude of a June ethylene contract drop in Europe, an initial settlement finally emerged €120/tonne ($149/tonne) down from the month before.

With ethylene players bracing themselves for prices to plunge by as much as €200/tonne, a contract was agreed on May 25 at €1,205/tonne free delivered (FD) Northwest Europe (NWE). The decline was a reflection of softening supply-demand fundamentals as well as a weak feedstock market, according to one major producer.


Players were uncertain how far prices would fall

Copyright: RexFeatures

Reduced demand and weak upstream crude oil and naphtha over the past few weeks had fueled widespread speculation that the June contract price would drop significantly. Activity in the ethylene and its derivatives markets throughout May had stagnated as a result.

May's contract was agreed at €1,325/tonne FD NWE, although the decrease of just €20/tonne from April's record-high contract settlement 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 had been positioning themselves for minus €90/tonne to minus €200/tonne, with minus €120150/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 needed downward correction.

"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 materialized. Why? Because we have been priced out of the market," the major consumer said, adding 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," the consumer 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 the June contract]."

One major producer said the price trend was clear, adding 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 €120150/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," the second producer 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 those for 2011, and therefore, a dramatic adjustment to the contract price next month would not be workable.

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," another producer said.

However, a 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 markets a much-needed boost, they added that the markets had reached a point where this was the "only option."

"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.

Author: Nel Weddle and Andy Brice

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