The weakened state of the domestic market in butadiene must be taken into account during March contract price negotiations, sources in the Northwest European market said Friday.
Contract discussions for the March CP have begun and are expected to be completed next week, but many sources have expressed fears that the likelihood of a significant increase in price compared to the February CP of Eur1,935/mt ($2,595/mt) FD NWE will put pressure on downstream markets.
European prices have risen strongly since the beginning of 2012 on the back of booming export opportunities to Asia.
Spot prices in NWE have risen by $1,320/mt since the start of the year, with a March trade reported done as high as $3,726/mt FOB NWE last week. Some sources have reported bid levels around $3,700/mt this week, although a cooling of the Asian market has stemmed the rise for the moment.
The US Gulf Coast market is also now seen as a potential export outlet for European product as turnarounds on the production side have begun to tighten the already net short USGC market.
US March CP nominations are up strongly compared to February, with the average increase from nominations at 28.5 cents/pound or $628/mt. This equates to Eur472/mt, and European industry sources have suggested that an increase as high as Eur400/mt be on the table from producers for March.
While the export market has brought strong prices in Europe, the domestic market has suffered.
Demand is down according to derivative producers, and spot inland prices have been reported at much lower levels than the FOB market. Spot delivered parcels have been heard offered at Eur2,200/mt, while a consumer recently confirmed buying a 1,500 mt parcel at "February MCP plus 9% (Eur2,109/mt).
Because of this, some sources fear that the size of the rise being discussed for the March CP settlement could hit the market.
One producer not involved in discussions said: "People have been talking about a possible increase of between Eur300-400/mt, which seems too high. Europe is not the same market as Asia. Our consumers can't afford increases in line with the spot moves we've seen. We need to be careful, because the market could collapse."
A second producer also acknowledged a balance had to be struck between the needs of domestic buyers and those in other regions, and said: "I don't want to kill my own customers, and I know they will be concerned if prices go too high,"
The producer added: "Local consumers are not happy, but they have to accept that export opportunities are there. People are buying, and they are paying more than the local buyers."
Consumers have already discussed selling their contract volumes back to spot buyers for export, with many noting that the disconnect between the domestic market and export price levels offer margins that can't be achieved from derivative products.
A European consumer added that should the price increase for March be too great, it will impact demand as consumers simply cut rates.
The consumer said: "We won't buy contract volume beyond a 10% increase (which equates to an outright price of Eur2,129/mt or a rise of Eur194/mt). We will just reduce our production if prices go too high."
Alongside the strength of the regional markets, there has also been a steady climb upstream which has increased the value of Crude C4, from which butadiene is extracted.
Crude C4 is currently valued at a factor to naphtha of between 1.65-1.70 CIF NWE, a level that has been rising since the beginning of the year where it was seen at a factor of 1.40. Added to this is the increase in the price of European open spec naphtha which closed at $1,048/mt CIF NWE Thursday compared to $891.75/mt at the end of 2011.
However, while producers are seeing their costs increase, one consumer believed that the current margins provided by butadiene were more than enough to cover the upstream climb, when considered historically.
"The delta between Crude C4 and butadiene in 2009 was Eur200/mt, today its more like Eur600/mt. When producers tell me they have to increase against their feedstocks I say 'take it away from your margins'," the consumer said.
Platts data shows that at the beginning of January 2009, there was a delta of Eur234/mt between the monthly contract price and the value of Crude C4. By August 2010 (when the MCP was at its highest point of that year), the delta was Eur767/mt.
Based on the February 2012 MCP of Eur1,935/mt and the last Crude C4 assessment which was equivalent of Eur1,306/mt, the delta is currently seen at Eur629/mt.
However, given the likelihood of an increase of at least Eur200/mt for the March CP the delta is set to move towards Eur800/mt based on the current value of Crude C4.
