INSIGHT: Crash in key European petrochemical April contract prices forebodes difficult Q2

Nigel Davis

01-Apr-2020

LONDON (ICIS)–Fast falling spot prices pointed the way, but the precipitous drop in April contract prices in Europe for the major olefins and aromatics still came as a shock.

Commodity prices, alongside most others, can and do fall steeply at times, and the 2008-2009 financial crisis demonstrated that.

But we haven’t seen commodity petrochemical contract prices falls of this magnitude since then.

The European ethylene contract reference price for April was set on Tuesday down €200/tonne at €720/tonne, the lowest monthly contract reference price since June 2009.

The ethylene contract essentially tracked steam cracker feedstock naphtha down as would be expected, but has also been pressured by lower downstream demand disrupted because of the coronavirus pandemic.

Ethylene and propylene demand in Europe has not been too bad to date although what is coming over the horizon is probably not good.

As ICIS reported on Tuesday, while ethylene supply and demand fundamentals are soft, demand has been better than expected for downstream products in packaging and those with hygiene and sanitary applications.

The rump of olefins demand into larger-scale industrial end use markets, however, are being hardest hit against the backdrop of the widespread coronavirus lockdowns across Europe.

The naphtha prices tracked by ICIS in Europe were down $179/tonne on average in March compared with February, so the market is building in a fair proportion of demand side negativity.

Much less of a demand-side negative impact appears to have been factored into the Europe April propylene settlement which, according to ICIS, was agreed €650/tonne, down €175/tonne from March.

It cannot be clear whether hand sanitizer demand is underpinning that for propylene – because it is such as very small proportion of propylene demand – but market sentiment can be strange.

No more so, perhaps, than in butadiene (BD) prices, which have fluctuated enormously over the years.

The butadiene market, however, is directly linked to synthetic rubber which has been knocked sideways by the collapse of demand into the largely shutdown automotive industry.

The Europe April BD contact reference price was marked down 27% to €525/tonne, a four-year low.

The remarks from one contract participant on 25 March tell the story: “[Feedstock] is the only quantitative factor, it’s the only solid number we have. … Who knows about supply and demand?”

The olefins spreads to naphtha illustrate the sort of returns that olefins producers are facing in the current extremely difficult chemicals market environment.

The first quarter will have been difficult for the major producers in Europe, but spreads and margins would have looked good given the falling feedstock values.

Now that those values have come home to roost, however, the real impact of the coronavirus lockdowns starts to become more apparent.

For the cracker operator and the refiner, however, it has been the downright collapse of aromatics prices, alongside crude and naphtha, that has been particularly shocking.

The Europe benzene April contract price dropped 70%, reflecting significant spot price falls across March as the crude price fall undermined the market.

At the same time, it has been clear that market demand has floundered with the automotive shutdowns hitting demand for the most important benzene derivative styrene.

Crude oil prices fell to an 18-year low on Monday (30 March).

The European toluene April contract price settlement is expected this week, and the aromatic is also under intense pressure.

European toluene and mixed xylenes (MX) spot prices crashed to 15-year lows in the final full week of March.

The chemicals can be fed into the gasoline pool or into chemicals, depending on demand.
Prices rise and fall relative to Eurobob gasoline which has been under extreme pressure  from the crude price fall and much reduced gasoline demand.
TOUGH Q2

Running into the second quarter, producers at the top of the major petrochemical chains are facing major uncertainties as regards to demand and a mixed picture as regards spreads and margins.

Spot and contract naphtha margins based on average spot and March contract prices have looked good.

The cost of production of ethylene theoretically even turned negative.

But as the new wave of contract prices show in Europe, the markets have shifted dramatically down, not one gear but many.

The second quarter will be particularly testing for all market participants.

Insight by Nigel Davis

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