INSIGHT: Cracker and PE margins volatile on feedstock swings

06 August 2012 17:42  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Olefins and polyolefins producers globally are deeply concerned about the demand environment. The macroeconomic news is dispiriting to say the least, with the US economy struggling to show much in the way of growth and Europe seemingly even more deeply mired in the eurozone crisis.

The financial markets on 2 August registered their view of the latest remarks on the eurozone crisis from president of the European Central Bank Mario Draghi. The gains made earlier that day were quickly wiped away following the ECB chief’s speech

Such uncertainty and volatility has translated directly into weak industrial growth. Add to that the cloud under which the construction industry sits in Europe and North America, and the slowdown of China’s growth engine and the demand picture is far from good.

At the cracker and the polymer plant, producers are struggling to generate a decent profit as customers operate from hand to mouth. They are challenged to balance the demand picture with a hugely volatile cracker and polymer margin environment.

Cracker feedstock cost volatility is playing its part in swinging margins one way and another. The drop in naphtha and then the monthly ethylene price in Europe has squeezed margins in Europe so far in the third quarter.

The spring back in ethylene and propylene monthly contracts agreed last week played its part in pulling cracker operating margins back up, although producers have felt that the sharp drop in olefins contract prices was too steep in the first place.

Contract ethylene margins in Europe have moved up sharply following the higher price agreed for ethylene last week even though naphtha costs were higher.

“Contract ethylene margins (naphtha) jumped by more than €100/tonne [$123/tonne] following higher August olefin contract settlements,” ICIS says in its latest weekly margin report for ethylene in Europe. ICIS calculates an overall margin for a typical cracker based on feedstock costs, ethylene contract prices and cracker co-product credits.

Spot ethylene margins suffered a considerable fall based on naphtha costs, which were up 6.4% week on week.

This move in spot ethylene margins is reflected in the margin that is calculated for the typical Asia-located, naphtha-fed steam cracker.

Feedstock costs were 6% higher and the naphtha-based ethylene margin for a northeast Asia cracker dropped by $120/tonne. Ethylene prices were $30/tonne higher but flat co-product credits could not cushion the blow from higher-cost naphtha. In southeast Asia, likewise, increased naphtha costs hit players hard. Their cracker margins trail those in northeast Asia to a considerable degree.

In Europe, integrated polyethylene (PE) margins rose strongly as product price rises matched the €140/tonne increase in the August ethylene contract price. On a standalone basis the increase in the polyethylene price was all but wiped out by higher ethylene feedstock costs.

Both integrated and standalone PE margins in Asia were battered as the higher naphtha cost took its toll and the cost pass-through from ethylene was not achieved on the polymer. The price premium in northeast Asia against southeast Asia was again apparent.

Not surprisingly the picture is different in the US, where gas cracking is so important. Ethane-based ethylene contract margins rose slightly following a decrease in ethane cost. Spot ethane margins slipped as lower ethylene prices countered the ethane cost price fall.

Not surprisingly naphtha cracking margins in the US weakened on higher naphtha costs.

Integrated domestic PE margins were slightly higher even though PE prices were flat. Higher export prices helped lift integrated export PE margins. Naphtha-based producers saw margins fall as feedstock costs increased and could not be passed on to the polymer.

($1 = €0.81)

Read Paul Hodges’s 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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