The recent run up in the price of crude, which has pushed prices in the entire petrochemical market to record levels, looked set to continue in the near future.

In Europe, the value of the Platts benchmark assessment for North Sea Dated Brent crude oil has hit new records as low stock levels in the US and strong hedging activity have driven global crude prices close to $100/barrel, from a level of approximately $67.50/barrel late August, according to Platts data.

The outlook for naphtha prices in Northwest Europe will be of particular concern. The strength in the CIF NWE naphtha assessment has been largely the result of the surge in Brent crude futures. Although the naphtha crack has stayed in positive territory, reaching as high as $3.30/barrel on October 9 according to Platts data, the trend since then has been downward, with the crack hitting negative territory by November 7.

Since then however, naphtha cracks have moved back to positive, although barely, closing November 20 at around plus 25 cents/barrel.

The decline has come as a result of, and in sharp contrast to, the racing flat price, which has stormed to an all time high of $837/mt on November 20, and recording along the way 17 fresh record highs since the assessment passed through the $700/mt level on September 20.

High naphtha prices impact margins

The high naphtha prices have hit almost all sectors of the petrochemical market, and have gradually eaten into the cracker production margins. This is evident for European steam cracker operators, as margins in November have hit the lowest values for 2007, at $59/mt (Eur40/mt) at close of November 20, according to Platts calculations. European cracker margins in January was at $492/mt (Eur379/mt).

Many European ethylene producers are locked in to either a bi-monthly or a quarterly contract for the supply of ethylene to the derivatives markets, such as polyethylene, PVC and monoethylene glycol. As a result, crackers operators have been unable to pass on the higher cost of their primary feedstock, naphtha. This lack of flexibility in supply has therefor, hit their bottom line.

With diminished profits, some cracker operators were facing low to negative variable cost margins. Cracker margins of below Eur100-150/mt, industry sources said, mean that cracker operators are running at a loss. However, despite this slide in margins, no reductions on cracker operations were visible in the market, so far.

"Cracker producers are not reducing operational rates because of strong contractual volume off-take," one ethylene producer said. "Customers are still taking maximum volumes."

Consequently, ethylene producers said they would be looking to recover their margins and saw room for sizable increases in the upcoming December-January bi-monthly and Q1 ethylene contract negotiations. (The October-November CP and the Q4 CPs were both set at Eur945/mt FD NWE).

However, ethylene suppliers were expected to face a stiff challenge from their customers because of the weaker demand in the PE and PVC markets. In addition, subdued buying of these resins on the spot market, improved material availability, presence of imports and arbitrage facilitated by the low dollar versus the euro, resulted in a downward trend in PE and PVC gross prices in November.

In the European LDPE market, for instance, market sources reported contractual business at Eur1,285-1,290/mt FD NWE this week, Eur30/mt drop on October, according to Platts data.

Created: November 19, 2007