FocusEurope Sept olefins contracts likely to rise on upstream costs

24 August 2012 14:29  [Source: ICIS news]

By Heidi Finch and Samuel Weatherlake

LONDON (ICIS)--The European ethylene and propylene contract prices are likely to rise significantly in September to recoup cracker margin losses in view of higher upstream costs, but buyers are concerned that downstream demand and competiveness with other regions will be jeopardised, market players said on Friday.

Monthly contract price discussions have not yet started in earnest, as some players were still absent from the market because of the summer holidays and as those present continue to monitor upstream price developments.

Initial indications, however, suggest that a three digit hike in excess of €100/tonne ($125/tonne) is being targeted by producers, who said that they had no option but to pass on the current higher naphtha costs in attempt to restore profitability at cracker level.

In May and June, cracker contract margins based on ethylene were pegged at €758/tonne and €809/tonne, but had plummeted to the €200s/tonne by July and this continued until the week ending 17 August, according to ICIS data. Spot cracker margins based on ethylene were even more under downward pressure, with values dropping from €336/tonne to €85/tonne over the same period.

This downward pressure on cracker margins has been largely due to the general uptrend in naphtha costs in July and August.

Late on Friday morning, naphtha costs traded at $974-976/tonne CIF (cost insurance freight) NWE (northwest Europe). This compares with an average naphtha values of $830.50/tonne one month ago, according to ICIS price history.

Olefin sellers stress that it is not only the firmer upstream costs that have impacted cracker margins, but also insufficient compensation from co-product credits such as for propylene and for butadiene.

Ethylene and propylene buyers acknowledge the intensified cost pressure, which they said will reluctantly push up contract prices significantly in September. They are mindful that three digit hikes could negatively impact downstream demand, which remains fragile because of the soft macroeconomic conditions.  

One ethylene buyer said “that crude and naphtha is up, but the problem is with demand. Certain derivatives can’t take further (price) increase pain.” It added that it is difficult to cope with the upstream price volatility especially with ongoing economic uncertainty.

Buyers are also mindful that further price increases in Europe, taking into account current values, will make derivative competitiveness with the other regions even more difficult. As a result, buyers are trying to limit increases to €60-90/tonne where possible, but sellers are expected to remain firm on their stance if feedstock costs remain high.

One net consumer in the ethylene and propylene market said that it ws necessary to react sooner to upstream volatilty and pass it on down the value chain, otherwise lose volume. The same source said that Europe has not reacted soon enough or sufficiently to the upstream volatilty over the last months, which needs to be redressed.

Ethylene and propylene demand in Europe has held up reasonably well in August, despite the European summer holidays. However, some players suggest that this is more pre-buying, in anticipation of the possible higher contract prices in September, rather than being reflective of any fundamental improvement in demand.

September is traditionally a good month in terms of demand, as players return to the market and re-stock after the holidays. Buyers, however remain cautious about demand and expect it to remain flat in the second half of the year,  if olefin prices remain high and economic conditions fragile. Sellers, however, suggest that orders for September are at a good level, with no evidence of any drop in demand despite the expected higher contract prices.  

The European ethylene market remains balanced to tight on the back of reasonable demand, ongoing reduced cracker operating rates in Europe for margin reasons and no fresh deep sea import availability. The propylene market has moved more balanced as the residual length from derivative plant issues in recent weeks has been offset to some extent by some exports to Asia.

There are still some surplus propylene volumes available, thought to be at parts of the coast and in particular in the Mediterranean, but nobody seems to be in a distressed postion and sellers prefer to keep some stocks and sell at a higher price in September.

Sellers are also mindful that supply may be more limited in September, if demand remains good and in the context of production problems at one main cracker and lengthy cracker turnarounds. Buyers, however, have not experienced any problems sourcing material, because the main cracker maintenance shutdowns are planned and are coinciding with some derivative turnarounds too.

As the propylene market remains slightly better supplied than for ethylene, there is some talk that the ethylene increase may be slightly more than for propylene in September, although both are likely to be significant in magnitude.

The European August ethylene contract settled at €1,175/tonne FD (free delivered) NWE, up by €140/tonne from the previous month, and the August European propylene contract settled up by €120/tonne at €1,055/tonne FD NWE.

In related news, negotiations for the September butadiene contract are continuing and price ideas remain far apart.

While many contract participants were reluctant to discuss precise targets, producers emphasised the detrimental effect of rising naphtha costs on their margins, while buyers noted that the Asian market is still falling.

Several sources had suggested a rollover as a possible outcome, but a producer said on Friday that it is seeking a three-digit hike for September. The August butadiene contract price was agreed at €1,575/tonne FD NWE, up by €75/tonne from July.

($1 = €0.80)

By: Heidi Finch
+44 20 8652 3214

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