INSIGHT: Northwest Europe cracker margins continue strong as H2 advances

LONDON (ICIS)–Ethylene producers in Europe are performing remarkably well with margins close to record highs so far this year.

Recently, ethylene availability has improved with the drawing to a close of the spring maintenance season. But domestic demand on the whole remains very healthy, market players said last week. They are expecting some improvement in spot market liquidity but not necessarily a significant lengthening of supply.

Towards the end of the first half, year to date margins are very strong. Players have done well on ethylene and to a somewhat lesser extent than last year on the totality of co-product values from naphtha cracking.

In the second quarter to date, calculated cracker margins based on naphtha feedstock and spot prices to Friday 15 June are 72.3% higher according to ICIS data.

On the same basis (compared with the second quarter of 2016), contract margins based on naphtha feedstock are up 59.1%.

Naphtha feedstock costs are higher than in the second quarter of 2016 but so are ethylene prices and, particularly, prices for the co-products in their entirety – a basket of prices including those for propylene, butadiene and the aromatics – benzene, toluene and the xylenes.

While not a great deal of spot ethylene has been changing hands recently, the sharp rise in contract margins shows that there is money to be made.

Ethylene has to be made into something and the underlying chemical industry growth trend in Europe has improved in recent months and, sufficiently, to allow European industry economist, working through the trade association Cefic to forecast overall EU chemical industry production growth of 1.5%.

The ethylene-led petrochemical business is threatened by the new crackers coming instream in the US, and other key crackers in Asia and the Middle East eventually could work to take away export demand for downstream derivatives. Currently, however, the picture is bright and companies should be making good money – the top of the cycle conditions persist.

ICIS data showed on Monday that in the year to date naphtha contract margins in northwest Europe are up 39.6% while spot margins are up 74.1%.

LPG (liquefied petroleum gas) margins are up a healthy 19.6%.

Downstream for the cracker stock building will have played a part in the first half, with customers wary of the fluctuating oil price and on the look out, possibly, for a bargain later in the year should oil, naphtha and ethylene and derivatives prices fall.

The positive story at the cracker, for instance, is not fully reflected for integrated polyethylene producers but the numbers are by no means bad.

The second quarter to date increase in integrated low density polyethylene margins based on domestic prices and naphtha feedstock for the cracker are 15.2% higher. In the first half to date, the year on year increase (compared to the full half year in 2016) is a more modest 4.0%.

ICIS reported last week that buying appetite in the European polyethylene market had been limited.

Naphtha prices were falling and buyers could afford, apparently, to adopt a wait and see attitude. There is a suggestion that this situatio0n might persist until late August.

As far as imports are concerned, product ordered in March has only just arrived in Europe’s ports. The higher ethylene price may have deterred some integrated players not to produce even more tonnes of polymer given the apparently well-supplied market.

By Nigel Davis

Additional reporting by Nel Weddle and Katherine Sale