Europe olefins margins improve, demand keeps up but problems ahead loom large

LONDON (ICIS)–While the spread of coronavirus continues unabated across the globe, its impacts have so far been rather fortuitous for European ethylene and propylene producers, but none are under the illusion that the status quo will prevail.

Primary feedstock naphtha prices have nosedived, coming close to its lowest recorded in early 2004 at the start of this week.

Cracker margins have been ramping up – in the last week alone naphtha-based contract cracker margins have risen by 43%, according to ICIS margin analysis – having been on a downwards trajectory for most of last year.

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BREATHING SPACE
The low crude oil price environment has given some cracker operators, who were contemplating cutting cracker rates to manage growing ethylene surpluses, some breathing space.

Prior to the fall, exports as a means to manage balances were off the table – Asian prices were soft, meaning European netbacks were below cost when taking into account the freight element.

Low oil has afforded a bit more flexibility for sales as evidenced by a raft of ethylene exports totalling around 46,000 tonnes, fixed over the past two weeks.

DEMAND STEADY TO FIRMER
By most accounts, demand has been better than expected in March, largely due to some pre-buying as derivative producers try and plan against expected increasing restrictions on supply chains.

Some derivatives, notably in packaging and hygiene/sanitary sectors, are experiencing healthy levels of demand, with propylene’s derivative isopropanol (IPA) reaching reaching record price highs.

Buyers typically postpone all but basic volumes into the next month when upstream values drop, as this inevitably drives the outcome of the next month’s contract reference price settlement.

Sources say they have seen little evidence of this this time around, aside from some restraint on incremental purchases of propylene as spot prices are firm on tight supply, and affordability is a real consideration given the demand uncertainty going forward.

UNCERTAIN FUTURE
With crude oil forecasts having been revised significantly lower for the second quarter, cracker margins look set to remain relatively healthy.

However, with more disruption expected to derivative supply chains as efforts to contain the spread of the coronavirus are stepped up, potentially resulting in derivative plant closures, it is questionable how much of that margin cracker operators will be able to really enjoy.

“Logistics is key. The question is: can they [derivatives] ship things out and, if not, should we be taking the raw materials?” a derivative producer said.

The shutdowns have begun in the automotive sector  – one of the most important end-use markets for chemicals – with car manufacturers Fiat, Ferrari, Wolkswagen, or PSA announcing closures at plants across Europe, because the supply of various components has been disrupted.

Europe’s economy is expected to contract because of the virus impact, leaving players up and down the value chains extremely cautious over demand levels for the remainder of 2020.

Not surprisingly, players are spending a great deal of time contingency planning, and several have said they have started to intensify their measures.

“We are dealing with everything on a day-to-day basis; today’s decisions may not last until tomorrow,” the derivative producer said.

April order books in some derivative sectors were still showing reasonably normal levels of demand.

“People are uncertain and just put in orders as normal, they may still cancel or postpone until later on,” another derivative producer said.

There is a lot of concern as players prepare for as yet unknown consequences and scenarios.

APRIL CONTRACTS: TRICKY
In the midst of all of this, producers and consumers on the European ethylene and propylene markets will have to determine what is an appropriate contract reference price for ethylene and propylene in the next couple of weeks.

“April discussions will be tricky; it will be a challenge to find settlements,” a second integrated olefins source said.

April contract reference prices are expected to be set by the end of the month.

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Front page picture source: Stefan Klein/imageBROKER/Shutterstock

Focus article by Nel Weddle

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