OUTLOOK ’16: A confident start for Europe ethylene and propylene

LONDON (ICIS)–What an extraordinary year 2015 has turned out to be for Europe’s ethylene and propylene producers, and many expect the buoyant mood to continue well into 2016.

Having achieved historically high margins – the year to date average is the highest since ICIS margin analysis records began back in 2002 – on a combination of low oil, strong demand from key derivatives notably polyethylene (PE) and polypropylene (PP) and a series of unprecedented supply constraints, olefins producers are fairly optimistic that they can hold on to these margins for a while longer.

Yearly cracker margin averages (€/tonne):

“It’s a positive rollover for next year, we are very optimistic. Previously [last 2-3 years] the view was for a negative rollover,” a producer said.

Current indications suggest a robust start to 2016 in terms of overall demand.

“The issues have changed the way, buyers are thinking, supply security is key – a weak euro helps,” a polymer producer said.

“[We] expect strong start 2016 depending on feedstock, but if we can keep this current range then crackers can continue to enjoy good margins and low euro will help derivatives,” a trader said.

“[We are] very confident that 2016 will be very good for us, though there is a small risk that in the second half things will wane,” a source said.

Ethylene has been the more robust of the two markets in 2015, with ethylene derivatives in general performing well.

However, it’s been a much more volatile year for propylene, as non-polymer derivatives have struggled against competition from lower cost-driven derivatives ex US and Asia.

Reduced propylene consumption, together with some unplanned derivative issues, combined to bring about the lowest spot prices seen against the prevailing contract price for some time.

Players in these applications – oxo-alcohols, phenol, nitriles – say the prognosis is weak for 2016 performance.

“Pressure from global market conditions will continue, our volume expectations for next year are very low – [I have] never seen such low numbers,” a buying source said.

Propylene supply in both in the US and Asia is expected to be long throughout 2016, keeping downward pressure on global pricing. Significant on-purpose propylene capacity is due onstream in Asia in 2016.

In addition, firm ethylene demand and firm cracker margins means that European cracker operators will be less inclined to reduce rates.There is a similar situation for refineries, so from a purely European perspective, the supply tendency is expected to long.

“2016 is going to be interesting, high production rates [are] expected at crackers, consequently propylene should be available in Europe and globally,” a second trader said.

“There is [propylene] length globally and this will continue into Q1[or] Q2 of next year,” the polymer producer said.

As a result, in Europe, some players have restructured their propylene contract supply portfolios in order to increase flexibility in terms of spot exposure.  

“We have cancelled a couple of contracts and done quite some restructuring in our supply portfolio, we are very cautious," a propylene buyer said.

“[There will be more] ad hoc spot buying, 2016 is a new game,” a second propylene buyer said, adding that it had structurally reduced its derivative production in Europe and instead will import more from its assets elsewhere in the world.

“[Propylene] imports were not seen as so much of a threat before, but the [spot price floor] has been broken, the propylene CP should have come down sooner,” a third trader said, “things have changed and the market is much more competitive now.”

The widening gap between ethylene and propylene contract values and its impact on cracker production dynamics is likely to be a talking point in 2016.

Is the elasticity of cracker margins sustainable? Can ethylene support the complex? These have been frequent questions posed by sources this second half of the year.

Operators had got used to an average propylene, ethylene ratio at around the 0.9 mark, the average since January 2009 when contracts changed to monthly from quarterly, but this year the average has moved to 0.88 as the ratio slipped into the 0.70s from September. A ratio of this level has not been seen since early 2009, and prior to that not since July-August 2001.

Monthly propylene/ethylene ratio:

 “Can Europe see the ratio down to 0.6, 0.55, 0.5?” an integrated player said.

“The current level of 0.72 is certainly a long term low,” it said.

“Its time to forget that old view, they [cracker operators] have managed before, adding that it’s the new normal," the polymer producer said.

"[It should be] fundamentals managed by economics and, if it come to it, changes in production dynamics. We need to push those boundaries and test that elasticity," the integrated player said.

“Will producers dare to have a reality check [on propylene CP values] in 2016?” the third trader said.

Given the production problems of 2015, reliability in 2016 is not surprisingly a big concern for consumers

“Its unfortunate that with low oil and historically high margins, we are not benefiting from that,” an ethylene consumer said.

“We hope for no extra reliability issues so we can also benefit,” its said, adding that the one thing they had asked for in 2016 is more information about when and why things go wrong.

“Not to accuse anyone, but we need better and more detailed info,” the ethylene consumer said.

From purely a scheduled maintenance standpoint, the slate for 2016 is very thin. The following table sets out the known maintenances to date, but these are not confirmed by the companies in question, and news of planned outages may emerge as the year wears on. Several companies have a policy of not disclosing production or asset news.

Another topic that players will be keeping a close watch on is the proposed lifting of sanctions against Iran. There are mixed opinions about the net impact on Europe, a few are fearful, others meanwhile suggest that in reality there are still many unanswered questions regarding timing, whether certain conditions will remain and so on. The Iranians themselves appear confident that the sanctions will be lifted in either the first or second quarters and have been strengthening their internal processes  in anticipation.

"If Iran sanctions will be lifted next year I fear that we will drown in petchems", a fourth trader said.

“Will Iran be the loose cannon, and have an adverse effect?” a second integrated player said

European players on the whole remain pragmatic

“It should be a positive story about the Europe market adjusting to global market conditions to help sustain more competitive positions for derivatives," the first integrated player said.

Agility looks to be becoming second nature for European olefins.

By Nel Weddle

http://www.icis.com/resources/news/2015/12/31/9955580/outlook-16-a-confident-start-for-europe-ethylene-and-propylene/