Europe olefins supply crunch expected in H1, challenges to come in H2

LONDON (ICIS)–2017 has got off to a firm but relaxed start for European ethylene and propylene players, who so far appear confident that all the necessary preparations to cover the spring cracker turnaround season have been met.

“Preparation is key,” a consumer said. ”We’ve taken advantage of low spot prices during the fourth quarter of 2016 to help with turnaround preparations.”

2016 ended on a better-than-expected note from a demand point of view – spot volumes were attractively-priced and an increase in the January contract price was widely anticipated – and, with the turnaround season due to start at the end of the first quarter at the back of their minds, consumers were of the opinion that lower prices were unlikely.

Cracker margins have remained healthy and although 2016 naphtha-based contract margins fell 2%, year on year, they are 17% higher than in 2014.

Average yearly margins 2000-2016

Such cracker margins continued to incentivize high cracker operating rates through 2016, which, alongside unplanned derivative issues, led to lengthy supply during the fourth quarter.

Some producers managed to mitigate this through exports despite largely unfavourable prices – recent data from Eurostat showed that just over 100,000 tonnes of ethylene were exported from the EU to the rest of the world in November alone.

Other producers, unable to access export markets, were forced to trim rates.

January-November 2015-2016

Most sources anticipate a generally tight first half of the year, but supply could be especially so in the March-April period.

Sources naturally point out that planned turnarounds should not have so much of an impact, particularly since derivative maintenance is often planned to take place alongside, but memories of previous two-year’s asset unreliability remain at the forefront and consumers, and producers alike will have taken great care to make sure that every eventuality is taken into consideration.

“[We are] expecting full speed ahead on crackers – 100% – but unreliability is a clear challenge. We are at the ceiling of production, there are technical limitations,” a producer said.

Another indication of consumers’ preparedness in case of supply issues has been the suggestion that buyers have opted for higher volumes under contract in 2017 than seen in the previous couple of years.

“There has been more interest to contract out, and with increased flexibility on volumes”, the producer said.

Increased flexibility on contract volumes reflects the uncertainties on the second half-year outlook for both ethylene and propylene.

Ethylene, because of the raft of new crackers due to start up in the US throughout 2017, and particularly in the second half of the year.

New derivative output – notably polyethylene (PE) – is also due; with this in mind, European PE players are only confident of conditions during the first half.

Some are not so convinced that the impact will be seen in 2017.

“While on paper there is new capacity, it could be a re-run of several years ago,” a second producer said.

“Much was made of the tsunami of ethylene and polymers coming from the Mideast [Middle East] but we saw delays and the impact was much more moderate than expected,” the producer added.

In Asia, ethylene producers are bullish despite a lighter turnaround season and some capacity growth on the back of increased demand due to some downstream expansion plans.

However, prospects again grow dimmer as year-end 2017 approaches, because of fears over the new US capacities.

Propylene is even more unclear. While Europe should at best be balanced, if not tight at times, both the Asian and US supply and demand balances are expected to be lengthier because of new capacity start ups which could in theory help to correct any Europe imbalances.

In Europe itself, the return to service of the Karlsruhe-Ludwigshafen propylene pipeline – destroyed in the fatal explosion at BASF’s Ludwigshafen, Germany, site in October – is expected around mid-year, which could take some of the pressure off sellers in the inland market.

“[There is] no reason to believe that the first six months of 2017 will be any different to the first six months of 2016 – supply tightened and spot prices rose to premiums,” a second producer said.

The producer conceded however that propylene had the added impact of the strikes at several French refinery and petrochemical sites in the May-June period.

“[The markets will be on the] tighter side for the first half largely down to the turnarounds, but focusing further forward, it is much more uncertain,” the first producer said.

“2017 will be a good year but there are challenges to come. In 2018, there could be a wall of ethylene,” it added.

The table below shows 2017 planned cracker maintenances heard so far. None have been confirmed by the companies in question, as most have a non-disclosure policy regarding the status of their assets.

Focus article by Nel Weddle

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