INSIGHT: Europe appears to defy persistent demand and cost issues

30 April 2013 17:47  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Integrated polyolefins producers clearly would like to make their money on the monomer given weak polyethylene (PE) pricing.

ICIS global margin data show where the dollars lie, and it is not in downstream polymer markets which have been beset with growth and price issues. 

These can be highly lucrative markets but they can also be tough, with competition fierce and customers using inventory to hedge against oil-related petrochemical feedstock price movements. Lack of demand growth for polymer, particularly this year in China after the Lunar New Year holiday and the once-in-a-decade leadership handover, has caused problems.

With economic growth in Europe virtually at a standstill and severe weakness in some national markets, polyethylene and polypropylene producers are struggling: on the one hand to match output and costs to demand and on the other to manage naphtha feedstock price volatility.

Naphtha prices dropped sharply towards mid-April as oil prices weakened, so it has been even more of a case than usual of capitalising on taking the margin where you find it.  

The ethylene feedstock cost decline appears to have been well played by some producers but it has led to a €100/tonne, or 7.9%, decrease in May ethylene contract prices in Europe. The Europe May propylene contract price was agreed down €80/tonne, or 7.2%. 

The olefins cost decrease is being passed on in the polymer, and polymer producers are keen to stimulate demand in a market which is subdued to say the least.

Many polyethylene (PE) and polypropylene (PP) producers are offering lower prices for May, ICIS reported on Monday 29 April, following the drop in the new monomer contracts. There is some hope that polyolefins pricing could hit bottom in May and come back because naphtha prices have started to tick up again. But the same old game is being played with buyers shrugging their shoulders and clearly not convinced.

Operating rates have been low for some while now and sources estimate then to be be 75-80% of capacity, according to the ICIS report.

The weak European economic environment does not engender any confidence, and producers continue to look long and hard at their European asset footprints and are cutting back where necessary. SABIC has announced cutbacks in Europe, while LyondellBasell says it is talking to Works Councils (employee representatives) about potential restructuring.

Restructuring is a continual process, but one which has been brought more sharply into focus as chemical firms with US crackers capitalise on low cost natural gas liquids (NGLs) feedstock – primarily ethane but also some propane.

European olefins and polyolefins sometimes look as though they are defying gravity, particularly to those resident outside the region, but producers understand full well that they have to grab profits when and where they can.

This is particularly the case as lower cost producers in the US join those in the Middle East in having a significant impact on global markets. The dominant cost positions of others make it even more difficult for European producers to operate profitably and consistently.

Currently, lower polymer prices in Europe (both polyethylene and polypropylene) suggest to some that Middle East imports will be diverted to Asia, but China markets are not strong. Spot ethylene prices are low in Europe: there is ample supply and little demand.

On paper, cracker operators in Europe were able to make more profit in April than in March. Average contract margins based on naphtha feedstock, including the value of co-product credits alongside the value of ethylene, were the highest since June 2012.

But this is also very much a question of demand. Continued demand weakness can only put further pressure on producers to seek longer-term solutions to what have become for Europe persistent demand and cost issues.

Read Paul Hodges’ 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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