European third quarter olefins contract negotiations are well under way

European third quarter (Q3) olefins contract negotiations are well under way, taking place against the backdrop of a buyers’ market, particularly in the ethylene industry. Both ethylene consumers and producers admit they expect a reduction in Q2’s €750/tonne ethylene contract, but what is far from agreed is the level of the decrease.

Buyers have been most forceful in pushing their positions. Many remain unhappy with the Q2 settlement and are extremely keen to achieve what they would see as a ‘representative’ agreement.

According to one independent buyer: ‘The level of ethylene contract price increases this year was a big mistake. The €10/tonne rise in quarter two added insult to injury. We were selling into numerous export markets; now because of high ethylene prices, we have been much less competitive. These high prices are killing us.’

Ethylene purchasers are pushing strongly for a significant drop of €100-200/tonne for the contract, arguing that ‘even if cracker margins dropped by €200/tonne, they would still be better than the previous five-year average’. Sellers note that European cracker operators are making extremely healthy margins. According to a series of cracker margin models, ethylene producers have improved margins in recent months. Cracker margins stood at around €230-250/tonne in Q4 2004, rose to €330-340/tonne in Q1, and then to a forecast average of €375/tonne in Q2. One observer notes cracker margins went well over €400/tonne for May alone.

‘Our margins have disappeared in Q2, do they (the cracker operators) have a God-given right to earn bags of money while we earn nothing,’ complained an ethylene purchaser.

However, an ethylene seller argues, ‘Anyone who is expecting the ethylene contract to drop by €200/tonne will not be involved in settling the contract for Q3. Is there some rule that I have to give half of my margins away. Why would I do that?’ Nevertheless, ethylene producers do admit that contract prices could suffer a three-digit decrease in the next quarter.

Olefins producers say that the lack of profits in key polyolefins derivatives has little to do with what is happening at the cracker end of the chain and everything to do with dynamics within the polyolefins sector.

A number of ethylene sellers cite overcapacity and a lack of pricing discipline as the main reasons why derivative margins are so poor. ‘They have to get their own house in order and live in their own markets, rather than wasting time complaining about us,’ says one.

Falling spot numbers also add to the impression of a buyers’ market, suggesting that ethylene contracts will dip substantially in Q3. When €750/tonne was agreed for the Q2 ethylene contract, spot numbers stood at $900-950/tonne for deep-sea product, with product off the ARG pipeline quoted at €720-750/tonne. Currently, deep-sea spot is around $600/tonne, with pipeline product offered as low as €500/tonne.

Lower cracker feedstock costs are another reason buyers want to see a substantial price dip for Q3. Naphtha is now reported down at around $420/tonne cif NWE, compared with $480/tonne when the Q2 ethylene contract was settled.