INSIGHT: Feedstock uncertainty hangs over Europe ethylene

03 September 2013 17:33  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Renewed underlying market uncertainty was reflected this week in protracted negotiations on the Europe September ethylene contract price.

Oil and cracker feedstock price increases made buyer/seller negotiations particularly tricky with the two sides struggling to reach agreement.

Unusually, the monthly contract price was not established until after the end of the preceding month. Normally, it is settled, alongside the other major olefins, by the preceding month end.

Producer margins are under real pressure in the higher feedstock cost environment. And downstream from ethylene, derivatives are struggling to compete with supplies from other regions on the back of high ethylene costs.

There have been indications that Europe’s big petrochemical markets are turning up with demand pushing operating rates higher and introducing some tightness.

And there is likely to have been a degree of pre-buying in the usually quiet month of August ahead of September demand growth.

Inventories in markets downstream from ethylene are said to be low and there have been concerns about higher priced oil eventually pushing ethylene up.

Brent futures were up 5.8% in August but WTI up only about 1.4% with concern over possible military action by the US and its allies in Syria working to push prices higher.

European cracker operator margins have been squeezed, ICIS showed on Monday, with typical naphtha cracker margins collapsing for the week ending 30 August.

In that week, naphtha costs had risen by 3.2% on a $16/tonne increase in the naphtha price and a stronger US dollar. Naphtha-based spot margins were sharply lower but operators were cushioned by higher margins for cracker co-products.

Margins based on LPG (liquefied petroleum gas) were significantly lower.

The turn down meant that average margins for August were the lowest for 12 months and clearly were behind the push for a higher September ethylene contract price.

Margins for players in Europe integrated into polyethylene were the lowest since the start of 2012 and behind the push for higher prices generally.

The increase in ethylene will be passed on where possible.

Only Dow Chemical appears to have been clear about the sort of increase it would like to achieve for polyethylene in Europe in September. ICIS reported on Friday that several PE sellers were waiting for the ethylene settlement before making their price targets clearer.

Naphtha prices in Europe have been volatile and demand for chemicals relatively weak so buyers in the downstream chemical markets do not seem to be prepared to want to pay more than the ethylene price increase when it comes to agreeing on September prices.

The Europe ethylene monthly contract price for September was confirmed by ICIS on Tuesday at €1,260/tonne ($1,658/tonne), up by €50/tonne from August. The increase was seen as a good compromise by one buyer. But the uncertainty in the market was expected to persist and needed close monitoring, suggested a seller.

Those remarks sum up the current situation quite neatly.

There appear to be patches of improved demand in Europe but these are short lived, one financial analyst, Paul Satchell of Canaccord Genuity, suggested last week.

“There are, as yet, no visible signs of a return to the more orderly buying patterns which are a key hallmark of healthy chemicals markets," he added.

Additional reporting from Heidi Finch, Linda Naylor and Joseph Chang 

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By: Nigel Davis
+44 20 8652 3214

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