FocusEurope C2, C3 MCP talks hindered by upstream volatility

29 August 2013 14:12  [Source: ICIS news]

naphtha crackerLONDON (ICIS)--European ethylene and propylene contract talks for September are proving more difficult than expected because of the spike in upstream values this week, and larger target increases than initially anticipated are being weighed against downstream affordability, said market players on Thursday.

Late morning on 29 August, Brent crude oil values traded at $115.78/bbl and naphtha at $967-969/tonne CIF (cost, insurance & freight) NWE (northwest Europe). This is in stark contrast to upstream values at the end of last week, when Brent crude oil traded at $111.00/bbl and naphtha at $919-921/tonne CIF NWE. The upward tendency for crude and naphtha so far this week has been driven by geopolitical tensions in the Middle East.

Last week, possible price increases for the ethylene and propylene monthly contract price (MCP) were widely expected, based on firmer feedstock costs over the last month, but the magnitude being discussed was more modest than is now the case.

Hikes of €40-70/tonne ($53-93) were largely being talked about by some sellers last week, although buyers were looking to limit increases to €10-20/tonne, if not roll over prices in a few cases.

However, price targets have been revised upwards this week, driven by the spiking upstream costs and heightened pressure on cracker margins and economics. Some sellers said that proposed increases had moved above €50/tonne and a few other suppliers were even more bullish – looking for triple digits.

One producer said that, if naphtha stabilises at this high level, it would look for a price hike of at least €100/tonne from a feedstock and economics perspective. It added that, if naphtha were to continue to rise, it would look for price hikes of €150/tonne for both ethylene and propylene.

Buying sources, however, were aghast at the level of increases being targeted. Some main customers maintain that the average monthly naphtha feedstock move is normally used as the reference point in monthly olefin contract discussions. They said this is being digressed from, based on the heightened upstream volatility this week.

One propylene buyer said a modest increase is necessary, taking into account the average naphtha feedstock movement, and it is also prepared to pay a “risk premium”, linked to upstream volatility, considering that increases of €40/tonne would be realistic. It said that the upstream sentiment would then be monitored over the next month and any correction implemented in next month’s discussions if necessary.

The same source said its demand has been weaker domestically and it is struggling to be competitive downstream in Asia. A substantial increase in the contract price in Europe is likely to further jeopardise its downstream competitiveness, unless prices for its derivative in Asia were to move up.

An ethylene customer ruled out price targets of €100/tonne as overly ambitious and echoed a similar view regarding rises of €20-25/tonne being more reasonable, taking into account the monthly average feedstock movement. It said that its demand remains lower than the same period last year, thought to be for economic reasons.

One propylene and ethylene consumer, however, reluctantly acknowledged that price increases of €50-60/tonne may be possible, based on the recent strengthening in upstream values along with some unplanned cracker issues. The same source said that such a substantial increase would not bode well for certain derivatives, based on already low downstream margins.

As the end of the month is fast approaching, positions between ethylene and propylene buying and selling sources remain quite far apart. The contract price traditionally settles before the end of the month for the market discipline and the sake of downstream clarity. Some sources said that they will eagerly monitor upstream values today and tomorrow morning to try to gauge if upstream costs will stabilise at this higher level of if it is more of a temporary change – with the hope this will lead to settlements for ethylene and propylene being reached by month end.

One buyer said it was dissatisfied that the monthly olefin contract price is getting settled later and later in the month, which means that downstream players are left in limbo and lack any real clarity of direction when making nominations for next month.  

In contrast to the substantial MCP expectations for ethylene and propylene in September, and the recent volatility seen for butadiene, less change is expected for the European butadiene MCP  for September. Butadiene September MCP negotiations are continuing, with participants indicating that they expect an outcome between a rollover and an increase of €50/tonne.

The European August contract price settled at €1,210/tonne FD (free delivered) NWE for ethylene, €1,090/tonne FD NWE for propylene and €750/tonne FD NWE for butadiene. The ethylene and propylene contract prices in August had moved up by €40-50/tonne respectively, while butadiene had dropped by €250/tonne compared with the previous month.

Additional reporting by Sam Weatherlake

($1 = €0.75)

By: Heidi Finch
+44 20 8652 3214

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