European operating rates (OR%) for ethylene averaged just 82% in 2010, according to APPE data this week. This meant there was no improvement over H1 OR%, suggesting the recovery from 2009's 76% OR% has stalled.
Of course, in terms of profitability, 2010 will have been a great year. The industry did its usual excellent job of passing through higher crude prices, whilst the low OR% led to tight propylene and butadiene markets, and strong co-product margins.
And so far, 2011 seems to have continued on a similar basis. But there are clear signs that it is becoming more difficult to pass through higher upstream costs:
• Prices for PVC, for example, a major ethylene user, are pegged by ICIS pricing at $1000/t, similar to January 2010, when Brent crude oil was $75/bbl.
• By contrast, PET prices, another major user, have moved up sharply over the past year due to tight supply conditions. But now, the Wall Street Journal is reporting that giants such as Coca-Cola are finding it very difficult to pass these on to end-consumers.
In the short-term, unrest in the Middle East is helping to support current crude oil pricing, just as Israel's threat to bomb Iran led them to peak at $147/bbl in June 2008. But in terms of the fundamentals of supply/demand along the value chains, today's oil prices are looking more and more out of line with reality.