24 September 2013 11:45 [Source: ICIS news]
LONDON (ICIS)--Europe’s ethylene contract price (CP) has been gradually moving out of sync with the value of its main feedstock naphtha, and an adjustment needs to be made for the sake of the contract pricing mechanism, according to the major ethylene consumer Solvay.
“Since September 2012, ethylene is too expensive,” Solvay said
Solvay said that one of the reasons the disparity has evolved is because of the tendency for contract negotiations to focus on the delta change to the naphtha price as opposed to the absolute price for the month.
Ethylene began to veer away from the correlation in September 2012 when the industry was facing a significant upwards adjustment on the back of the naphtha price increase during August 2012. The ethylene CP settled up by €125/tonne ($169/tonne) for September.
"Not surprisingly, ethylene producers, concerned over a continued upswing in feedstock values following a sudden shift upwards, are usually keen to build in a risk premium to cover any adverse volatility during the new contract period", Solvay added.
However, in September 2012’s case, the feedstock upswing was short-lived, leaving the contract – at €1,300 /tonne FD (free delivered) NWE (northwest Europe) – overpriced, in Solvay's view. During the October 2012-August 2013 period the focus remained month after month on the naphtha movements and not enough on the naphtha price itself, and the disparity grew.
"With respect to the correlation, ethylene CP was too high by €60/tonne on average", Solvay said.
Solvay is keen to point out that the correlation with naphtha should be used as a guideline during the contract negotiations as other factors – supply and demand – for example also play a part.
"October 2013's case will most likely be qualitatively similar to September 2012's (as the naphtha upswing observed end of August/early September will not be representative for the full September month), and the disparity between ethylene CP and naphtha will grow again", Solvay said.
It added, "a progressive correction is necessary for the sake of the whole ethylene CP mechanism".
However, such a “non-market” adjustment would be hard for ethylene producers to swallow since cracker margins are under constant pressure. The margin average for 2013 to date is only slightly higher than the margin average for the past two years, according to ICIS data.
In order to illustrate this disparity and using public data, the graph below shows the correlation ethylene CP (month M) = 1.333 times naphtha (month M-1) plus a constant of €257/tonnes relating to fixed and utilities costs, established from January 2009 through to August 2012, and also shows that since September 2012 all ethylene CP's are above the correlation.
($1 = €0.74)
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