21 January 2013 00:00 [Source: ICB]
While participants in the European ethylene and propylene markets have been heartened by the improvement in activity, this has been tempered by the fact that visibility regarding upstream developments and macroeconomic conditions remains poor.
An improvement in demand compared with December was already widely expected because of restocking but a contributory factor has been the unplanned cracker issues at Borealis' Stenungsund plant in Sweden and notably the outage at Naphtachimie's Lavera France cracker following a compressor fire.
Unplanned European cracker issues have tightened supply
"It's not a Hosanna, but it is a nice start," an integrated polymer producer said, "we were reasonably optimistic [for January] anyway."
Other sources agreed. "It's not a big surprise - all of us managed to empty the pipelines completely all through the chain," an olefins producer said. "It's a much different story compared with [end of] 2011 - all the warehouses were full then."
However, while there was more optimism that general market conditions could be improving; there were still hurdles to be overcome, not least the ongoing eurozone debt crisis and its negative impact on demand.
"[I] don't think there will be a miracle," the integrated polymer producer said.
The olefins producer said; "the pipeline will soon be filled and only then will true demand be revealed."
"There are reasons to be bullish, but there is no fundamental shift in demand," a major consumer said."
"People are evaluating if the slight improvement is good demand or restocking," a second olefins producer said. The producer added that it believed the demand to be a combination of the two but agreed the markets were still weak compared to past performances.
Sources said that stability in the upstream markets remained key. Companies would then have the confidence to make plans and define short-term strategies which in turn would support further improvement.
"If we have stability in upstream then we have stability in olefins, polyolefins - people do not want any big surprises," the second olefins producer said.
Cracker rates have been ramping up, but some cracker operators said they have so far increased rates by only 1-2% over December, generally pegging an average European rate at or above 80% compared with about 75-80% in December. However, other operators report much higher rates at some sites - above 90%. There is usually some disparity depending on location, system and derivative portfolio.
A couple of players said that as new 2013 contracts come into effect, they would naturally expect an uplift in operating rates but that it was not necessarily economic sense to produce marginal tonnes, even though spot prices have improved. Some ethylene and propylene spot offers are considered too pricey, especially with regard to February or March deliveries despite the onset of the cracker turnaround season.
Ethylene is regarded as balanced-to-tight, while propylene - notably polymer grade propylene - is viewed as tight, a complete reversal of its status for the last few months of 2012.
"It is clear that the length we have seen for some time in C3 [propylene] has completely disappeared," a trader said.
This is also attributed to some cracker operators having switched to lighter feedstock slates because of better propane economics.
"[There has been] more activity in the first few days of January than in the whole of December," a second trader said.
Admittedly, much of the demand on the spot market has been a result of the Lavera cracker outage, with both the joint venture operators and their customers looking to cover prompt shortfalls. Spot prices are firmer as a result, but still below the prevailing January contract prices.
Sources have remarked on the deep-sea ethylene volumes having been booked from Korea, Taiwan, the United Arab Emirates (UAE), the US, Mexico and Argentina to Europe for January and February arrival and said this was evidence of good demand.
Most, however, suggest that a combination of cracker maintenance preparations and a newly operational terminal are behind the activity. Total incoming volume has been estimated at around 48,000 tonnes. It remains to be seen whether this momentum on imports will continue.
"[January] will remain a relatively strong month, if you have product, you could make some good business," the first trader said.
The January ethylene contract price settled at a rollover of €1,275/tonne FD (free delivered) NWE (northwest Europe). The January propylene contract price settled at €1,090/tonne FD NWE.
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