Ethylene and propylene spot markets are traditionally slow during contract negotiations, as players like to wait and see the outcome before committing to volumes, but this time around there is not much optimism that normal activities will resume once the new contract numbers have been established.
"Everyone is delaying [buying] decisions," a trader said.
Other sources said that even some speculation centring on a possible increase in the contracts, as producers push to improve margins that have been faltering on upstream volatility and a weak euro, had not resulted in any fresh interest.
The lack of visibility is weighing on sentiment and there are just too many concerns and worries over the global economic outlook, despite market participants stressing the need for calm. A drop in crude and naphtha prices on Thursday added to the uncertainties.
Expectations for the ethylene contract vary between a rollover and a small increase from September’s contract price of ?,115/tonne ($1,507/tonne) FD (free delivered) NWE (northwest Europe).
"It's really difficult to judge," a major consumer said. "We hear long and loud about the economic crisis, our volumes are still on a reasonable level, but everyone is expecting a significant decline in demand."
"Spot prices are still down, which suggests a decrease [in the contract], but on the other hand margins need an increase," it added.
"Whatever the compromise we find, no one will like it," the major non-integrated consumer said.
"If we make a reduction, then there will be a downward spiral," a major integrated producer said, adding: "Everyone believes an increase is the only way."
This producer's view, echoed by several other producers, was that lowering prices would not stimulate demand sufficiently and would certainly not preserve margins. Rather, improved margins plus production, which is finely controlled, would help stabilise and support downstream markets.
“When the overall margin is so low, and volumes low, the push for improvement or even sustainment of both derivative and cracker margins can only come from behind,” a major integrated consumer said.
Some sources added that the key olefins derivatives – polyethylene (PE) and polypropylene (PP) – needed upstream pressure to cut out incremental production which, in turn, would support more profitable prices.
Dow and Polimeri have already announced sizeable price initiatives for October PE in the past week.
Ethylene spot prices have been fairly steady, albeit still below contract value, since early August. However, some sources said this week that the situation appeared to be worsening as the spot market was coming under further pressure from competitive offers of displaced Middle East tonnes.
It was likely that European cracker rates would be reduced further, sources said. Currently, cracker operating rates are pegged on average at around 80% of capacity, down from rates in the last quarter estimated in the high 80s%.
Expectations for October propylene are a little more difficult to discern. September propylene settled at ?,078/tonne. A rollover is heard as is a potential increase of up to ?0/tonne, and a small decrease, but in general few sources are willing to openly outline their views.
Spot propylene prices have been languishing significantly below the prevailing contract price since July. Such a large disparity between the two sectors – as much as ?00/tonne at times – has not been seen since the monthly contract process began in January 2009.
Consumers point out that such a prolonged disjoint between spot and contract prices must be reflected in the contract outcome.
Sources were in agreement that the outcome of the October contract settlements will be critical for the health of the industry. The settlements are expected early next week, well ahead of the upcoming European Petrochemical Association (EPCA) conference in Berlin on 1-4 October.
($1 = ?.74)
