FocusEurope olefins market gears up for October contract price talks

21 September 2012 13:00  [Source: ICIS news]

By Nel Weddle

An ethylene plantLONDON (ICIS)--European ethylene and propylene contract partners are gearing up for the next round of discussions to decide on the October monthly contract price, but with volatility in the upstream market, a new value is proving difficult to predict, market sources said on Friday.

"Another week, another surprise” a key producer said in reflection of the latest developments on the crude oil and naphtha markets.

Naphtha prices dropped to around $900/tonne (€693/tonne) CIF (cost, insurance, freight) NWE (northwest Europe) on 20 September, after having broken the $1,000/tonne barrier only last week. Values did pick up slightly on Friday morning to $929-931/tonne.

Naphtha was softer on the back of a fall in crude futures, following the release of disappointing Chinese manufacturing data - with a stronger US dollar and Saudi Arabia’s plans to raise oil output adding further pressure on the market.

“We should all pray for stability,” an integrated olefins player said, adding; “a better announcement from the Saudis would be that they intend to cap and collar brent between x and y.”

It is clear players are losing patience with the rollercoaster ride on prices this year, which has seen three digit swings from one month to another. The ethylene contract gained €265/tonne from January to April, then lost €310/tonne through July, only to be hiked by €265/tonne in the last two months.

“Stability would be good for the market, but we should be careful not to exaggerate the adjustments as it causes problems downstream with inventory management,” a second key producer said.

After the September olefins contracts were settled on 31 August, naphtha prices had begun to increase, which naturally gave rise to speculation that yet another hike would be implemented for October, albeit at a more modest level than seen in the August to September. This is despite concerns regarding demand levels going forward.

However, sentiment on the downstream markets was already beginning to take on a more bearish tone last week with demand on the key derivative polymer markets, as well as some others, faltering because of high prices and the stronger euro.

The downturn on the feedstock markets has meant buyers are now hesitating over purchases, sensing a potential drop in the October contract price.

One major buyer said: “I am not so sure that producers aiming for an increase for October will have such a tenable position now – there is no room for margin improvement.”

“This is called a crisis and the cake is small for everybody,” the buyer added.

Olefins producers were generally keen to caution against any extreme adjustments, particularly downward movements.

A third key producer said: “I don’t have a problem to reduce the CP [contract price] if naphtha is down – derivatives are under significant pressure  - however we do need to take care to guard against the unpredictability [of upstream]."

The producer added that poor demand levels were indeed a problem, but could not be considered a crisis, as this was a term that should be reserved for situations such as what was experienced in late 2008, early 2009.

The first key producer said: “[It’s] important to remember that cracker margins are still very low and not close to the historic average – naphtha going down makes it harder to push for an increase, but anything below [current contract price] does not make sense."

“We’ve seen so much volatility, we just need to err of the side of cautiousness,” the second key producer said.

Most contract parties said that it was still early days and internal discussions still needed to be done, but the contract prices were expected to be settled by the end of next week.

The September ethylene contract price settled at €1,300/tonne, which was up by €125/tonne from August. The propylene contract price meanwhile settled up by €105/tonne at €1,160/tonne. The contracts are agreed on a free delivered (FD) northwest Europe (NWE) basis.

($1 = €0.77)

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By: Nel Weddle
+44 20 8652 3214

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