Are you feeling the pinch?

By Malini Hariharan

With crude oil at around $88/bbl and naphtha hitting $890/tonne cfr Japan on Monday, the pressure is building up along the olefins chain.

Ethylene is trading at around $1200/tonne cfr NEA while propylene is at $1280/tonne cfr NEA. Offers of ethylene at above $1250/tonne and propylene at $1320-1330/tonne have not found any takers.

Further downstream, polyolefin offers have been raised and some business has been transacted at levels higher than December prices.

One trader believes that market fundamentals are quite strong. “Price hikes in January are possible; supply is still short for some grades. I am positive,” he says.

He is also confident that Chinese government measures to tighten liquidity this year will not be at the cost of economic growth.

However, others say the outlook is still uncertain. “Chinese demand is not as strong as expected; there is also resistance to high prices,” says one source.

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The Chinese government’s decision in late December to raise interest rates by 25 basis points is likely to dampen buying especially by traders. And supply is rising as new plants in Thailand, India and the Middle East ramp up production.

“This is the downcycle; we are in it now. Operating rates will have to be cut; it is only a matter of time,” says one very pessimistic source.

In the short term producers have to contend with naphtha which is being supported by crude oil prices and a cold winter in the northern hemisphere.

Naphtha is predicted to remain firm as supply is set to tighten following refinery turnarounds in the Middle East.

Traders say that Abu Dhabi National Oil Company (ADNOC) is due to shut a 140,000 bbl/day condensate splitter for a month from mid-January. And Saudi Aramco is expected to slash naphtha exports to Asia by half a million tonnes in the first half of 2011 due to refinery maintenance in Rabigh and Jubail.

Prices are likely to ease only in the second quarter once cracker turnarounds start in Asia. If that’s the case the pressure on margins is likely to continue.

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