Europe olefins margins hit by economic downturn but still in good shape

Miguel Rodriguez Fernandez


LONDON (ICIS)– Cracker margins in Europe have been dented by the coronavirus-related economic slump and the oil price crash, although they still remain at high levels compared to the margin averages seen in recent years.

Naphtha-based cracker operators, which account for the bulk of olefins producers in the continent, have seen their contract margins decline by a third since the last week of March, according to ICIS margin analysis.

Despite the steep drop, current contract margins are much higher than the average figures posted over the last few years.

Naphtha-based contract cracker margins remained at $738/tonne of ethylene produced in the week to April 17, whereas the average margin in 2019 was $523/tonne and in 2018 was $562/tonne.

Among crackers using liquefied petroleum gas (LPG), both spot and contract margins portray a grimmer picture, being close to some of the record lows seen over the last years.

The fall in naphtha-based cracker margins over the last couple of weeks is mostly due to the new ethylene and propylene contract reference prices for April, both of which settled significantly lower on the back of the unprecedented drop in upstream crude oil prices.

The April ethylene contract reference price was set at €720/tonne, down by €200/tonne from March – the lowest monthly contract reference price since June 2009. As to propylene, the contract price was settled at €650/tonne, compared to €825/tonne in March.

Upstream costs have continued to soften through April with average naphtha values, the key driver in the contract reference price discussions, seen around €71/tonne lower in April so far, compared with March.

From a supply and demand perspective, ethylene is long, while propylene overall is fairly well-balanced although there are regional differences.

In both cases though, the demand picture has been mixed with those derivatives moving into packaging, medical and sanitary sectors seeing much better than expected offtakes, while others servicing the automotive sector and latterly construction, are very soft.

Demand could improve a bit in May, as coronavirus restrictions have been eased in some countries allowing for some industries to restart operations. Construction activity is restarting in Spain, which will support polyvinyl chloride (PVC). Similarly the Italian government said Italy’s manufacturing, automotive and construction industries will be the first to restart from 4 May when lockdown rules start to be eased.

However, other lockdowns have been extended further into May – in general, players remain extremely cautious about what’s ahead.

Perhaps more concerning though for many of Europe’s ethylene and propylene derivative producers is Europe’s cost position relative to that seen in Asia and the US. Despite the significant drop in the contract reference prices in April, Europe remains high, an unwelcome additional pressure, given the circumstances.

The May contract reference price discussions are due to start next week.

Front page picture: A cracker in Germany
Source: Clemens Bilan/EPA-EFE/Shutterstock

Focus article by Miguel Rodriguez-Fernandez and Nel Weddle


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