When feedstock price isn’t the loudest voice in the room

ICIS, Uncategorised

SHARE THIS STORY

The question came over innocuously enough.

“Market prices for ethylene are structurally the highest in Europe and lowest in US with Asia moving in between. … For MEG, however, my understanding is that there is not such a high difference between market prices in US and EU. What is the reason for that? Main cost driver for MEG is in the end the cost of ethylene.”

The answer I gave to the answer the email contact: Because the cost driver is not always the price driver.

That runs counter to production economics, which dictate that costs incurred in obtaining upstream materials should dominate downstream product prices. If the plastic I use to make a pen costs me $1, then logically the pen I make from it has to be priced at north of a dollar – probably at $2, since I like to pay my people well.

But what if half of the domestic pen market buys their pens from overseas producers who get plastic for just 50 cents, which allows them to sell their pens in my market for $1.25? I had better sell mine for around $1.25 if I want to compete.

That pen market is an analogue for the Europe monoethylene glycol (MEG) market, where pricing is not tied to feedstock ethylene because of substantial imports of the product from two regions – the Middle East and the US.

The ICIS Supply & Demand Database (a great product to understand current and future market dynamics) illustrates the supply/demand/consumption picture for Europe quite clearly:

Notice the circles. Almost 44% of Europe’s MEG consumption need in 2019 had to be met from imports, and it happens that the two regions exporting to Europe are the two most cost-advantaged at making ethylene – the Middle East and the US. See the trade flow chart below from the ICIS Supply & Demand Database, showing Europe’s net importer status (red bar) and the net exporter statuses of the Middle East and North America (blue bars).

With that much imported product coming in being made from cheap feedstock, that means pricing for European MEG is going to correlate more with MEG and ethylene price movements from those exporting regions than it is with product made from European ethylene.

Put another way, European MEG producers have to base their pricing strategies on MEG import prices way more than their own feedstock costs.

At least all the naphtha cracking in Europe means there are plenty of other co-products for integrated producers to make up for selling MEG so cheaply. The following margins graphic from ICIS Analytics shows an almost $500/tonne in co-product credits right now – that’s more than the MEG contract price itself!

Linear logic does not always dictate how chemical markets move, so it’s important to have access to tools that can decipher the mystery – tools such as ICIS Supply & Demand Database, ICIS News and ICIS Analytics. They answer innocuous questions with trusted insight.

Disclaimer: The views in this blogpost should in no shape or form be taken as actual forecasts and are my personal views only.

PREVIOUS POST

China’s new five-year-plan to accelerate petrochemicals self-sufficiency

24/08/2020

  By John Richardson IT IS ONCE again a critical moment in forecasting the ...

Learn more
NEXT POST

The pandemic and petrochemicals demand: a whole new approach is required

01/09/2020

By John Richardson MONITORING demand has never been harder because of the pandem...

Learn more
More posts
Chemical market whack-a-mole
18/09/2020

Anyone ever play whack-a-mole? The image here comes from the 1990s, a time of ill-fitting T-shirts a...

Read
Decoupling talk is decoupled from reality
11/09/2020

It was supposed to be a harmless press conference honouring the US Labor Day holiday, but President ...

Read
The US economy’s hall of mirrors
04/09/2020

The US economic recovery from pandemic-induced shutdowns is about as disjointed an endeavour as I ca...

Read
The pandemic and petrochemicals demand: a whole new approach is required
01/09/2020

By John Richardson MONITORING demand has never been harder because of the pandemic. One of my collea...

Read
China’s new five-year-plan to accelerate petrochemicals self-sufficiency
24/08/2020

  By John Richardson IT IS ONCE again a critical moment in forecasting the direction of China...

Read
Consumers will experience better days, and with newer clothes
14/08/2020

Most of the statistics bantered about right now are coronavirus-related, which means they are monoto...

Read
Why a new stimulus deal could be critical for US polyethylene demand
12/08/2020

By John Richardson GOVERNMENT stimulus is crucial for protecting polyethylene (PE) markets in the We...

Read
With so much hanging in the balance, let data light the way
07/08/2020

The fourth quarter (Q4) of 2020 is the most consequential quarter in generations. It feels like hype...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more