INSIGHT: Still making gains from lower-priced naphtha

25 June 2012 17:19  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The downward pressure on global petrochemical prices from the still falling price of oil is immense and while upstream margins are holding up this is a difficult time.

Monthly olefins contract prices in Europe could plunge by $100/tonne (€80/tonne) this week with sellers pushing for a fall of closer to $200/tonne. Naphtha costs are dropping but producers want to retain as much margin as possible in uncertain times.

Buyers expect to share in some of the relief offered to upstream players by lower naphtha costs. They face market demand that has been weak for months against the backdrop of the uncertain economic and financial environment. In the circumstances, the magnitude of the drop in olefins will prove to be vitally important.

Since the start of the second quarter, the European ethylene contract price has fallen 10.4% while spot prices are down by a third. The latter decline, particularly, reflects 35% lower naphtha and Brent crude off by 28%.

The positive aspect of lower oil prices is the boost they can give to the struggling global economy. A further downward shift, however, would really hurt corporate cash flows.

Lower petrochemical commodity prices also reflect much weakened global economic growth. It will be a few days before the July ICIS petrochemical index (IPEX) is calculated but it will track downwards based on the falls in upstream prices that have been apparent almost across the board.

The IPEX fell in June for the second consecutive month, by 6.8% to its lowest level since the second quarter of 2011. The greatest regional drop was in Asia – down 10.7% as butadiene prices fell by 31% and ethylene by 14%. But the US component of the index fell by 3.0% and the European sub-index dropped by 2.5%.

Hovering around $90/bbl, however, Brent prices better reflect economic realities than at the beginning of April when the marker crude basket touched $125/bbl.

Chemicals demand growth has slowed markedly not just in the European market which is overshadowed by the eurozone and sovereign debt crises. China’s economic slowdown has prompted a global response and hit chemicals demand hard.

The multi-million dollar question for petrochemical producers and consumers currently is where the crude price goes next.

Europe’s cracker operators, for instance, are deeply concerned about crude and naphtha price volatility. If European contract olefins prices drop too far this month and naphtha rebounds, olefins producers could be hit hard in a rising cost environment.

Currently, Europe naphtha-based ethylene contract margins are healthier, having jumped by €137/tonne to their highest since December 2008, according to the latest ICIS weekly ethylene Europe margin report.

Spot ethylene margins in Europe, based on naphtha, are up €71/tonne with cheaper feedstock costs outweighed by a $75/tonne decrease in spot ethylene prices. Spot ethylene prices in Europe fell by 33% between 6 April and 15 June.

Over the same period spot ethylene prices in the US plunged by 46% and were 37% lower in northeast Asia. The sharply lower ethane price in the US, however, has helped keep theoretical spot and contracted ethane-based ethylene margins relatively high although somewhat lower than in the first quarter.

Northeast Asia naphtha-based ethylene margins have rebounded from last week because naphtha has dropped further and downstream markets have already reacted, sometimes violently, to weaker demand.

Global economic uncertainty has been one of the factors helping to drive oil prices lower and no-one wants to get caught with higher-priced stocks.

However, there are those who believe that oil can still push back to $120/bbl and possibly even further in what they like to think is a commodities “supercycle” driven by underlying demand in the emerging economies.

But geopolitics plays its part as ICIS blogger and International eChem chairman Paul Hodges said in his Chemicals & the Economy blog this weekend.

It is possible that today’s price meets the needs of leading OPEC producers, he suggests. But he also puts forward the theory that Saudi Arabia is pressuring Iran and is prepared to take oil prices much lower.

If that is the case, then upstream petrochemical producers face further difficult price discussions in the coming months. It is hardly good for them to be running into the seasonally slower third quarter against the backdrop of weak end-use demand and such an uncertain feedstock and cost environment.

Ethylene prices fall on lower naphtha costs

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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