OUTLOOK ’19: Europe olefins pragmatic for 2019 as turnarounds, world events dictate caution

Author: Nel Weddle

2018/12/24

LONDON (ICIS)--Europe’s ethylene and propylene market players are contemplating potential 2019 challenges with a pragmatic view after high expectations for 2018 were truncated by external, unpredictable factors.

BASF's cracker at LudwigshafenSource: BASF

Key for 2019 will be cracker maintenance for several producers, and the way the market deals with them.

Another factor to look out for will be the trade war between the US and China, as its implications are likely to affect not only those two countries but the rest of the world.

The market's optimism for 2018 came on the back of the prevailing factors during 2016 and 2017, with players expecting that low crude oil prices, healthy demand, improved product margins and increased flexibility in cracker operations would put olefins in a good enough position to weather the challenges.

At the start of 2018, most sources would only mention as a looming challenge new polyethylene (PE) capacities in the US.

However, 2018 turned out to be a lot more challenging than expected.

Firstly, and more important from a long-term perspective, the US-China trade war has led to great uncertainty for downstream players as it could greatly dent final demand.

Secondly, and more local, the hot summer and historically low water levels on the River Rhine, in combination with cracker outages, left even flows in the ARG pipeline reduced for a period and caused the ethylene and propylene markets to be heavily fragmented.

Sellers dealt with great length in coastal regions, and significant discounts against the prevailing contract reference price, particularly on ethylene, were posted in order to try and move excess volumes.

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MAINTENANCE CRUNCH
Now that the Rhine has improved and flows are returning to normal, players can afford to spend a little more time looking forward.

Key for Europe is the cracker maintenance schedule in 2019, with a big crunch in the spring (April-June) and an equally sizeable crunch in the autumn (October-December).

Whatever happens in terms of global derivatives demand, this will undoubtedly constrain European ethylene and propylene supply and either offset soft global market conditions or put added upward pressure on the market.

Planned turnarounds.
2019 scheduled cracker maintenance*

Company Location Duration (weeks) Timing
Dow Boehlen 6 May-June
Versalis Priolo 6 Spring
Shell Moerdijk 8 April-June
BASF Antwerp 6,8 May-June
BPRP Gelsenkirchen 3 6 end Aug-mid Oct
BASF Ludwigshafen 1 5 Aug-Sep
Repsol Tarragona 6,7 Oct-Nov
SABIC Geleen 4 6 Sep-Oct
Dow Terneuzen 1 6 Sep-Oct
LyondellBasell Wesseling 4 n/a Sep-Oct
INEOS Grangemouth n/a H2 2019

* according to sources, may not be confirmed by companies

However, the 2019 maintenance season has been a topic high on the agenda for at least 12 months,  meaning preparations to cover the missing volumes have been under way for some time.

Throughout the course of 2018, and certainly in the first half, there was much concern over the gaps in supply - particularly on propylene - that were still needing to be filled, but there has been a notable change in sentiment just in the past couple of months.

It is not so much that there are no gaps still to be filled, but it seems there is more confidence among players that it will not be as difficult as first thought to access alternative volumes, should they be required.

Sources said this change in sentiment is down to the uncertainties over the impacts of the US-China trade war on global demand levels, together with an optimisation of derivative production in Europe itself in terms of the timing and duration of planned derivative maintenance.

Ethylene in Europe is long on a structural basis, hence the market continues to see structural exports and the heightened need to export spot volumes whenever something unexpected impacts on consuming units' operations.

This was the situation in April and May 2018. for example, where there was an unprecedented level of exports, a phenomenon more common at year-end.

Source: Eurostat
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While few doubt that ethylene supply will be constrained in 2019, and possibly even short if there are restart delays or other unexpected outages during the TAR season, there does not appear to be any real concern that there will be nothing available at all.

Moreover, there is still the impact of the new US PE capacities to consider, the magnitude of which will depend heavily on whether and how the US and China sort out their tariff differences.

PROPYLENE: HEALTHIER OUTLOOK
Propylene, on the other hand, is a different matter: the underlying fundamentals are still relatively healthy in terms of bottom line demand.

Light feedstock slates meant that propylene output was in a structurally tighter position in 2018, but both supply and demand were heavily impacted by the Rhine problems.

As mentioned above, several sources are still reporting some supply gaps in coverage, but they appear more relaxed than before and it seems this is also down to all the efforts and discussions surrounding potential volumes from the US and from Ruwais in the Middle East, as well as from Asia.

US volumes were expected to have made more of a difference to Europe’s balances in 2018, but a combination of production upsets, high US spot pricing, and strong regional demand kept these volumes away.

However, there has been a lot of talk over commitments made on a structural basis for incoming volume, although details remain vague.

Given its position as a by-product of the cracking process, propylene will still, to a certain extent, be at the mercy of the ethylene market's developments.

Poor ethylene conditions could lead to reductions on cracker operating rates and a further constraint on propylene supply.

With the ethylene and propylene markets continuing to diverge, this could turn the ethylene/propylene ratio on its head, a situation which was already considered a possibility for 2018 had the Rhine not disrupted supply and demand fundamentals so massively in the second half of the year.

ETHYLENE LONG IN Q1
Ethylene is expected to remain on the long side at least until the turnarounds get under way in the spring.

Some propylene length as a result of the Rhine disruptions needs to be worked through, and sources have said this will likely still be apparent in January.

How fast this is worked through will depend on demand, and quite a few sources expect a strong start to the year as derivatives stocks are rebuilt ahead of the turnarounds.

“There is a lot of catching up to do,” a source said.

The planned turnarounds should keep ethylene on an even keel but put propylene in a tighter position.

However, that will depend on the outcome of the tariff war – the conflict might be between the US and China, but its ramifications will be felt across the rest of the world in 2019.

“We do what we can. We do our best to optimise as much as we can [but] there are things we cannot control: it will be business as usual in 2019,” a second source said.

Focus article by Nel Weddle

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