Corrected:Asian Naphtha-Ethylene Spreads Touch 2007 Levels

We should have originally written ‘integrated low-density polyethylene (LDPE) in paragraphsix, but instead wrote linear-low density PE (LLDPE). It’s now been corrected and apologies for the error – we will be buying some better glasses (less of this “we” – it’s actually “me”!)

 

By John Richardson

The rise in ethylene prices to what ICIS pricing says is a 17-month-high has created the widest spread between naphtha and ethylene since 2007.

As of last Friday (29 January), the spread was $620/tonne, based on ethylene at $1,310/tonne FOB Korea -and naphtha at $690/tonne CFR Japan. This compares with a spread of $627/tonne on 17 August 2007 and a tremendous $667/tonne on 5 January of the same year.

In 2007, the world was vastly different as it was in the midst of the highest economic growth in a generation.

Interestingly, despite the inevitable complaints of squeezed margins by PE producers – and anecdotal reports of market-driven rate cuts and plant-idling – the latest weekly ICIS pricing margin reports tell a more nuanced story.

“Naphtha-based ethylene margins in Northeast Asia rose by $37/tonne due to weaker naphtha prices,” said The Ethylene Asia Margin report for 29 January.

Naphtha costs had fallen by 4.8%, offsetting a 4.6% dip in co-product values, the report continued.

Integrated low density PE (LDPE) and high-density PE (HDPE) margins also increased – by $30/tonne and $39/tonne respectively – said The Weekly Margin – PE Asia report.

And so the incentive for integrated producers to increase ethylene sales at the expense of PE didn’t seem to be that strong as of last week, despite reports to the contrary.

On a non-integrated basis, however, standalone LDPE margins fell to their lowest level since July 2008, the report continued.

Average January HDPE margins were the worst since way back in September 2004, it added.

I would strongly suspect that converters, who, like the standalone PE producers, lack market muscle because of their scale, are also being squeezed; the few who I have spoken to since the start of the year certainly claim this.

Ethylene-PE margins have been strong because of temporary supply issues.

“Some ethylene traders have a sense that C2 prices will decline from March because of increased supply,” said an industry source today.

“For example, a large amount of ethylene is expected to hit the market when the 800,000 tonne/year Shell cracker in Singapore starts up.”

Shell is expected to have 180,000-200,000 tonne/year of ethylene to export when its cracker is commissioned in Q1.

The remaining surplus from its cracker (it’s only associated plant is the 750,000 tonne/year Shell monoethylene glycol plant which came on-stream late last year) will be sold to other producers on Jurong Island, say market sources. How this will affect the market’s net balance is uncertain.

“Another factor to consider is that Shell has actually been buying ethylene in order to run its MEG plant. So you have a buyer who helped tighten the market becoming a significant seller of ethylene,” the source continued.

A further reason for the ethylene rally has apparently been tight supply from Iran as a result of unconfirmed cracker outages.

 Polyolefin supply has also been immensely tight since December on a host of production problems.

 Recent supply issues seem likely to be resolved over the next few months with a great deal of new capacity yet to come on-stream.

 The other reason to be bearish is the potential for weaker economic growth in China, concerns over which have led to a sharp correction in oil and other commodity prices during the past few weeks (higher crude has, of course, also underpinned the olefin-polyolefin price rallies).

 “The big factor to assess post-Chinese New Year will be the influence of China’s tightening of lending conditions,” the source continued.

 “The big monster in the room is China’s property market and whether that might collapse. This is very worrying, indeed.”

 As we said before, this is a very different world economy than in 2007.

 China’s huge – and now apparently inflationary - economic stimulus has perhaps provided temporary protection from a great deal of lost export trade to the West.

 Because of deep-seated economic problems in the West, this trade is unlikely to be regained anytime soon.

 

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