INSIGHT: Europe chemical prices crash, 32% of refinery capacity restricted, offline

BARCELONA (ICIS)–With European building block chemical contracts now settling at record decreases, and 32% of European refineries now offline or at reduced operating rates, more evidence of the damage caused by coronavirus restrictions and the oil price crash is becoming apparent.

On 31 March Europe ethylene, propylene and benzene contracts were finalised with the plummeting oil price and disrupted downstream markets leading to unprecedented drops.

There was a stunning 70% drop in the European benzene April contract price which settled at €171/tonne, a decrease of €424/tonne from March. This is the lowest since ICIS records began in 2002.

Deep falls were expected as the spot market has posted steep losses in the past few weeks. Demand collapsed because of the profound impact on the industry caused by coronavirus restrictions amid sharp drops in oil prices.

In particular, closures of automotive factories and persistently weaker dynamics in the styrene sector have hit benzene demand.

The European ethylene contract reference price for April was settled at €720/tonne, down by a record €200/tonne from March. This is the lowest monthly contract reference price since June 2009  and the largest single month-on-month adjustment since the contract timing changed from quarterly to monthly in January 2009 in response to the 2008 financial crisis.

Europe’s propylene contract reference price for April has been settled at €650/tonne, down by €175/tonne from March. This is the lowest contract reference price since May 2016 and marks the largest month-on month-adjustment since contracts moved from quarterly to monthly in January 2009.

REFINERIES DISRUPTED
With demand for transport fuels falling, especially for automotive and jet uses, refineries in Europe are reducing capacity utilisation or ceasing production. New research by ICIS shows that 32% of Europe’s refining capacity (including Turkey) is either offline or running at reduced rates (see map below).

This includes 25% of the region’s refineries running at reduced operating rates and 7% of refineries completely offline.

The prospect of reduced feedstock availability did nothing to dent to the huge drops in these monthly contract prices.

So far, reduced operations at Europe’s refineries are not disrupting chemicals production. They provide naphtha and natural gas liquids for chemicals production as well as around 30% of the region’s propylene supply.

Crackers are not yet experiencing any significant feedstock shortages. With demand still strong for some products such as polyethylene (PE), operators try to keep production running to plan.

Plummeting naphtha prices mean cracker production margins are excellent. Crackers are more likely to reduce rates because of a drop in demand than shortages of naphtha.

According to a producer on 2 April: “Crackers are doing well, a bright spot in a fairly tough refinery landscape currently.”

REFINING MARGINS NEGATIVE
Despite the lowest crude oil prices in decades, refinery margins are sharply lower as the global lockdown has crushed demand for transportation fuels.

According to ICIS senior analyst, Ajay Parmar, northwest Europe gasoline spreads have recently dropped to as low as $-6/bbl, with gasoil spreads also down and jet fuel demand destroyed.

“As a result of poor margins as well as concern for personnel health and safety, some refineries have been deferring maintenance and are looking to cut throughput. Spain’s Repsol cut refinery throughput by 10%, Turkey’s Tupras has cut by up to 50% and large Eastern European refineries have cut by up to 30%.”

He added that run rates will continue to drop over the coming weeks as the lockdowns are expected to continue for the foreseeable future.

DEMAND PUNCTURED
With Europe’s economy already in contraction, and sectors such as automotive and construction slowing or even ceasing production, demand is collapsing for many chemicals. Tourism plus the leisure and hospitality sectors are at a standstill.

Consumers are fearful of losing their jobs and are unwilling or unable to make big ticket purchases.

The European Automobile Manufacturers Association said this week that coronavirus is having an unprecedented impact on the sector. With nearly all vehicle manufacturing in Europe having come to a halt, the retail network is  effectively closed. The jobs of 13.8m Europeans are at stake, including 2.6m directly employed in automotive manufacturing.

On 1 April IHS Markit published its March Manufacturing purchasing managers’ index (PMI) for the eurozone which fell to 44.5, down from 49.2 in February. A reading below 50.0 points shows economic contraction.

The worst could yet be to come as unemployment rises, more factories close and consumer spending declines further. Cuts to capital expenditure across the board are likely to stifle industrial and construction activity further.

However the picture is not completely clear cut as demand has spiked for products going into food packaging, such as polyethylene (PE) and for sanitizing or protecting products. For most chemicals, though, these are smaller segments that will not compensate for the overall drop in demand.

Some customer industries are also building inventory in anticipation of disruption to supply chains later in the year. Others are depleting high-priced inventories to free up working capital.

COLLAPSING OR NEGATIVE OIL PRICES?
Some commentators suggest oil prices could turn negative, meaning suppliers would pay customers to take it off their hands.

International eChem chairman, Paul Hodges said recently “My forecast is for $10/bbl oil, but quite sensible people are saying to me that if there is no driving and not a lot of freight or jet fuel demand, tanks will be full,” said Hodges.

“If you want to store oil in April or May you will have to store it on a ship: if it’s going to cost $10/bbl to store it could be cheaper to offer a customer $5/bbl to take it away.”

He believes coronavirus could cause the biggest demand drop since the end of the Second World War, when GDP fell by 25%. He says a recession could take 10 years to recover.

Jonathan Lopez and Helena Strathearn contributed to this article.

Insight article by Nel Weddle and Will Beacham