FocusLower naphtha, weak markets weigh on Europe July olefins talks

22 June 2012 14:54  [Source: ICIS news]

By Heidi Finch

Europe C2, C3 discussions underwayEuropean ethylene and propylene monthly contract prices (MCPs) are widely expected to drop in July on falling upstream costs and ongoing market weakness.

The magnitude of decreases, however, will prove critical, as derivative competitiveness with other regions is weighed against upstream volatility and cracker margin preservation, market players said on Friday.

Initial talks for the July MCP have started in some cases this week, with sellers looking to limit reductions to €70-100/tonne, mindful of upstream volatility and of maintaining cracker margins.

Buyers, however, are pushing for larger price drops closer to €200/tonne, or more, to help regain derivative competitiveness with other regions and taking into account cumulative naphtha feedstock reductions, which have not yet been passed on downstream.

Even though the European ethylene and propylene contract prices have come down over the past few months, buyers said that previous reductions have been insufficient, as naphtha costs have generally continued to trend down since the settlements were fixed.

In May, the European propylene and ethylene contract prices fell by €15-20/tonne. In June, European ethylene and propylene MCPs moved down by €120/tonne and €125/tonne, taking values to €1,205/tonne FD NWE (free delivered, northwest Europe) and €1,105/tonne FD NWE respectively.

Naphtha prices traded at €661.55/tonne-€667.94/tonne CIF NWE (cost, insurance and freight, northwest Europe) on 25 May, at the time of the last olefins settlements, which compares to a naphtha price of €547.43-553.79/tonne CIF NWE on 21 June, according to ICIS price history. This marks a reduction of in excess of €100/tonne between the olefins contract periods.

Late morning on 22 June, European naphtha spot values traded at $689-697/tonne CIF NWE, which equates to €551.20- 557.60/tonne CIF NWE based on the day’s exchange rate and this would translate into a reduction of €100/tonne in relation to the time of the July olefins settlements.

Both buyers and sellers agreed that the feedstock pressure needs to be reflected in the new ethylene and propylene contract price. But while sellers think reductions of €100/tonne are sufficient, buyers think that a correction of €200/tonne if not more is necessary to address current and recent feedstock cost pressure.

Sellers, however, are also mindful of the volatility in the upstream market and the fact that crude and naphtha could rebound suddenly. The potential impact on cracker margins and economics makes them act more cautiously and in a more staggered way regarding possible price decreases.

“A [possible] reduction of €100/tonne is not peanuts and if we give more away, we will ruin cracker margins because there could be a rebound [in upstream naphtha costs] and we will get burnt,” a main producer said

Cracker margins have improved over the past few months, benefiting from the fall in upstream naphtha costs. Contract cracker margins based on naphtha feedstock more than doubled between March 2012 and 15 June 2012, rising from €365/tonne to €789/tonne, according to ICIS margin data.

Spot margins based on naphtha feedstock on the other hand fell between March 2012 and 15 June 2012, from €400/tonne to €350/tonne.

One main buyer said that there needs to be a more even distribution of margin in the industry between olefins and derivatives.

“Cracker operators are enjoying theoretical margins, but demand is not there underpinning them,” it added saying that the reduction in the MCP needs to take into account market difficulties in the face of the fragile economy and feedstock pressure.

A few other buyers stressed that a sizeable reduction closer to €200/tonne is necessary for the sake of derivative competitiveness with other regions.

One propylene buyer, for instance, said that the European contract price needs to get closer to the US propylene price. The June polymer grade propylene contract price in the US was settled at 52 cents/lb, which equates to $1,146/tonne (€916.80/tonne), in contrast to the €1,105/tonne FD NWE, which was agreed for the European June propylene contract price.

The same view was echoed by an ethylene consumer, who said that “the price gap with the US is substantial and it makes life not very easy [for exports]. If we look at the other regions, we may need more of a reduction than €200/tonne”.

European ethylene and propylene demand has been soft for several months, particularly in the main downstream polymer sectors because of the fragile economic climate, which has limited buying activity.

On top of this, the recent downtrend in naphtha costs has also stifled buying activity, as players have held back waiting for lower prices, particularly in the second half of the month.

Sources are hopeful that a sizeable price drop on the July MCP may stimulate demand, at least to some extent, if not regulate buying activity through the month.

This is in contrast to temporary purchases in the first half of the month, a characteristic of the past few months, as players have anticipated further price drops.

Players remain realistic, however. There may not be any significant improvement in demand at least until after the summer holidays in Europe and until there is some sign of economic recovery.

European olefins producers have cut operating rates to try to mitigate soft demand, but supply still remains on the long side for both ethylene and propylene.

There was talk that cracker operators had not cut back enough and had cut back too late because they wanted to hold on to margins.

Average cracker run rates in Europe are pegged currently around 75%. But some crackers are believed to be running below this at technical minimums. A few plants are thought to be operating closer to 80%, depending on location, individual cracker economics and the derivatives portfolio.

Buying and trading sources stress that reductions in the MCPs need to be “right this time” and want to avoid any modest or tempering price reductions from producers which do not reflect global price levels, economic and feedstock realities.

One producer said that “demand is where it is - the industry consumes what it can and what the economy can afford”.

Both buying and selling sources, however, will watch feedstock developments eagerly over the next few days, as they are likely to be pivotal to where olefin contract prices will end up for July.


By: Heidi Finch
+44 20 8652 3214

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