Europe ethylene paralysed by softening crude oil, naphtha

By Nel Weddle

LONDON (ICIS)–Europe’s ethylene market has been paralysed by ongoing weakness in upstream crude oil and naphtha with uncertainty over how far they will fall, sources said on Friday.

Demand was already soft, with high European contract prices having had the double-whammy effect of cutting the competitiveness of local derivatives in the global market place, while at the same time attracting cheaper monomer and derivatives into Europe. Supply is considered lengthy and players’ systems full.

However, the bearish trend in the upstream markets has meant that contractual consumers throughout the whole chain have reduced offtake to minimum volumes – with the weaker feedstock market fuelling intense speculation over a heftier decrease for the June contract price, than was seen in May.

This has put all but the most urgent buying activities on hold until the outcome for the June contract is known.

Spot market activity has been at a virtual standstill over the past couple of weeks as players are unwilling to commit to fresh spot volumes, even if they had the space to accommodate them.

Deep-sea spot prices have fallen about 16% over the past four weeks after prices peaked in the mid-$1,600s/tonne CIF (cost, insurance, freight) NWE (northwest Europe) mid-March.

Prices on the ARG (Aethylen Rohrleitungs Gesellschaft) pipeline are being indicated this week below €1,000/tonne ($1,266/tonne) FD NWE. The last time prices were talked in three digit terms was in December 2011.

The May contract settled at €1,325/tonne FD (free delivered) NWE, down by €20/tonne.

At the time of the settlement, some sources warned that a decrease of this magnitude was not enough and was a “mistake” as players downstream would expect more reductions to come and therefore would continue to keep buying on a hand-to-mouth basis.

Some sources already reckon on a three-digit decrease for June, but several doubt that this will be acceptable to producers who, despite acknowledging the improvement in cracker margins over the past few weeks, still say that on a year-to-date basis, the average margin is below the average for the whole of 2011.

“[The] feedstock costs [are] obviously down, price trend thus clear,” a major producer said.

However, it added that “year-to-date cracker margin is still not satisfying” and while it expected a substantial decrease it would not be as high as customers wish.

Additionally, there is a view amongst some consumers who do not feel that lowering prices significantly will stimulate demand, given the current macro-economic concerns. Instead, it could destroy whatever thin margin they have left.

Cracker operating rates have been trimmed in order to combat the length on the ethylene and propylene markets, but most sources say that the cutbacks have not yet gone far enough to rebalance the market.

“[Cracker] rates are certainly not where they were in February and March,” a second producer said.

“Every one wants to use this time when margins have expanded,” it said.

It estimated cracker rates to be at about 80-85%.

“They are still quite high, this is because everyone is printing money,” it added.

Other sources said that operating rates were down to 77% in some cases, but this seems to be more of an exception than the rule at present.

 “They [producers] have not trimmed early enough, the first signs were there in April, but they ignored it,” a source said.

“Building stock at this stage is madness,” the source added.

Current conditions are inevitably leading to comparisons with the crisis of 2008, but while there is a lot of pessimism, on the whole European sources believe that they are better prepared to deal with the challenges ahead.

“We are trying to avoid even mentioning 2008 – we are risking to get to that point, but there has to be actions in Europe,” the source said.

“Unless China picks up and the eurozone problems are resolved, it’s a bad market environment which won’t be resolved any time soon,” it said.

($1 = €0.79)

Follow Nel Weddle on Twitter