01 March 2013 09:09 [Source: ICB]
Buyers cite fragile downstream demand in battle against producers' plans to raise prices based on rising cost pressure
European ethylene (C2) and propylene (C3) producers are targeting sizeable price hikes for the March monthly contract price based on the recent increase in cost pressure and margin recovery at cracker level, market players said on 22 February.
Buyers, however, will struggle to accept anything more than a modest rise because of fragile downstream demand, they said. Contract discussions for March are just getting underway and initial ideas are already emerging.
There is some general expectation of a possible increase from a feedstock perspective, the magnitude of which is being discussed.
Cracker operators say naphtha feedstock costs have trended upwards over the last month and cracker margins have been eroded as a result, which they said needs to be addressed urgently.
On 22 February, European naphtha traded at $996-998/tonne (€757-758/tonne) CIF (cost, insurance and freight) NWE (northwest Europe), which compared to $942-943/tonne one month ago, according to ICIS data.
There was a similar-level move in euro terms during the same period, when naphtha moved up from €709-710/tonne CIF NWE to €752-753/tonne (figures have been rounded up, where applicable).
Ethylene and propylene manufacturers said they have no option but to pass on the naphtha-related increase and try and recoup lost margins at cracker level.
"Cracker margins are appalling and were already low [even before the recent uptrend in naphtha costs]. (The) market needs to brace itself for a significant increase," said a main manufacturer.
In the week ending 15 February, naphtha contract margins decreased by €31/tonne on a 1.7% rise in euro-denominated naphtha costs. Naphtha prices rose by $14/tonne to their highest level since April 2012, with the impact on margins accentuated slightly by a 0.2% strengthening of the dollar, according to ICIS margin analysis.
European contract margins for February based on naphtha were estimated at €325/tonne up until 15 February. This represents the lowest contract margin since August 2012, when it was at €258/tonne, according to ICIS data.
One producer said that cracker economics based on naphtha are so poor that where flexibility allows, operators are switching to lighter feeds to some extent, such as using liquefied petroleum gas (LPG) in a bid to save any costs where possible. This is in contrast to general feedstock tendencies for this time of the year.
In the week ending 15 February, LPG-based margins were set at €369/tonne, increasing their advantage over naphtha-based margins slightly to €44/tonne, the data showed.
Sellers are talking about increases of €50-100/tonne for the monthly contract price in March, with some maintaining that they will push for 3-digit hikes for both propylene and ethylene.
The general view among some players is that the increase for propylene is likely to be larger than for ethylene as there was some talk that propylene had been undervalued relative to ethylene over recent months and propylene is now tighter than ethylene.
Buying sources, however, said that any upward movement would be very difficult to accept in view of downstream demand, particularly in the main polymer sector, which remains fragile for economic reasons.
Some customers reluctantly concede that a modest increase of around €30/tonne is likely, taking into account the naphtha increase over the last month and if naphtha costs remain high, but they consider any proposed larger hikes of €50-100/tonne unrealistic in view of demand uncertainty amid ongoing soft macroeconomic conditions.
"I think cracker [operators] have a valid point as feedstocks are going up, but demand is not there to support it," said one customer, who added that an increase of €50/tonne would destroy downstream demand. He said that if the price rose by €100/tonne then it would not be worth buying.
A few buyers had said they would also look for rollovers or minor increases for the MCP in March as they remain mindful of downstream demand. However, sellers considered these buyers' targets to be "unacceptable" - particularly taking into account the feedstock movement over the last month.
One customer stressed that European ethylene is the highest priced out of all the regions - a possible increase in March would render European derivatives even less competitive globally.
It added that producers need to be careful not to push too hard - with cracker margins on the one hand and demand on the other, adding that ethylene derivative producers have no real margins and some are even negative, which is not sustainable.
The customer suggested a higher ethylene price would be impossible to pass on downstream and that they would need to cut back their downstream production for margin reasons. One buyer said propylene derivatives have regained some competitiveness globally following the recent firming trend in US values. It said that a significant increase in the contract price and the fact that the trend seems to be moving in the other direction in the US now could jeopardise European propylene derivatives.
Some customers maintain that downstream margins have also been eroded because of high costs - particularly as European ethylene remains the highest out of all regions and the underlying subdued nature of demand.
They consider that any price increases are likely to jeopardise downstream demand further. A few buyers said that downstream margins are thin and that margins need to be more equally distributed through the value chain.
One seller said that the contract settlements over the last few months have been very conservative and cautious - mindful of the underlying downstream factors. But it said that naphtha costs have increased to such an extent that this is no longer possible and higher costs need to be passed down the value chain.
The European propylene market is balanced to tight - as it has been more affected by cracker reliability issues and forthcoming cracker turnaround preparation because of its lower yield in the cracker manufacturing process.
However, buyers are not convinced that the market is as tight as sellers reported, because underlying demand is still soft, there is still some spare capacity that is not being utilised and there are thought to be some unsold import volumes ex-Asia for March arrival remaining, altthough the last of these has yet to be confirmed.
The ethylene market, however, remains more balanced than for propylene, because the crackers are aligned to ethylene demand and any cracker constraints have been offset to some extent by a healthy influx of import volumes during the first quarter.
Taking into account differing market fundamentals and the heightened volatility in the upstream markets and exchange rate conditions, the European March contract price discussions are likely to prove challenging and in the words of one buyer, "it [the March contract price] will also determine how activity will pan it out."
The European contract price for February settled at €1,275/tonne FD (free delivered) NWE (northwest Europe) for ethylene and €1,100/tonne for propylene. This represented a rollover for ethylene and an increase of €10/tonne for propylene from the previous month.
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