Olefins producers in Northwest Europe may start scaling back cracker run rates to avert a heavy build up of supply should a drop off in demand continue, industry sources said.
This will also help prevent a collapse in prices and provide some support on the market, particularly during the traditionally slow summer months, they said.
"I would expect producers to do furnace maintenance or other activities which reduce production at this time. Less efficient or older crackers might just take furnaces offline to balance with their offtake," a producer said.
"I do not have information on how other producers run their units, but the European system has to be reducing rates to deal with the reduced offtake from polyethylene and polypropylene," he added.
Another producer said cutting cracker output is now an "option" as demand continued to subside.
"The market is getting long," he said, adding his June propylene offers were getting very little buying interest at the moment.
European ethylene and propylene spot prices continued to slide last week as the subdued demand started to create some length in supply.
Spot ethylene prices were down Eur30/mt at Eur1,050-1,055/mt FD NWE Friday, the year's low, after touching a 2011 peak at Eur1,195-1,200/mt FD NWE on March 7. On the coast, prices were down $25/mt at $1,450-1,455/mt CIF MED and $1,500-1,550/mt CIF NWE.
For propylene, spot prices for the widely traded polymer grade have fallen steadily since April 28's Eur1,235-1,240/mt FD NWE and Eur1,235-1,240/mt CIF NWE to Eur1,170-1,175/mt FD NWE and Eur 1,150-1,155/mt CIF NWE last week as naphtha prices fell and demand faltered.
An integrated producer said its system was designed to be "structurally short" so it could quickly respond to sudden falls in demand without having to reduce cracker rates.
"Others who are set up to be balanced have a much bigger problem, and when downstream demand slumps, they have little option but to trim crackers, incurring a big variable cost penalty [in the process]," he said.
A number of traders said they will not be surprised if producers had been "quietly cutting back" on cracker production over the past weeks.
"I don't think [the monomer prices] will collapse. I think the cut back in crackers will be the hope [for the market]," a trader said.
Downstream, both polyethylene and polypropylene prices have come off from their historic highs as feedstock propylene and ethylene prices fell and orders slowed.
June contract prices for ethylene and propylene dropped Eur45/mt and Eur40/mt to Eur1,185/mt and Eur1,205/mt, respectively, from May levels.
Many PE and PP converters were seen buying hand-to-mouth, and were generally hesitant to restock in a falling market.
PP spot prices for homo injection grade, peaked at Eur1,385-1,390/mt FD NWE in late-April falling steadily to Eur1,315-1,320/mt last week.
Pressure in the PP market is expected to escalate further in the coming weeks with the approach of the seasonally slow summer period, compounded by the potential inflow of additional supply from the Middle East as the turnaround season in the region draws to a close, sources said.
Turning to PE, the spot prices for low density grade was described as "aggressive" by converters, with Eastern European material being offered at as low as Eur1,265/mt FD NWE.
End-user demand for LDPE was said to have slowed over the past two months compared with first quarter levels, particularly in Southern Europe, sources said.
"Many producers are being volume driven on the spot market," a converter said. A major LDPE supplier was heard to be switching off plant because of high inventory for 2-3 weeks in mid-June, sources added.
Ethylene and propylene have been tracking softer naphtha values, which have so far averaged $952/mt CIF NWE in June, down $34/mt from May. In euro terms, naphtha's June average was around Eur656/mt, Eur33/mt off from May.
Naphtha closed at $950.75/mt or Eur650.49/mt Monday, Platts data showed.
Crackers margins have meanwhile strengthened, with June averaging at Eur234/mt, up Eur13/mt from May's average, with the strong euro and lower naphtha netting out the decrease in June monomer contract prices.
The euro closed at $1.4616 Monday, after hitting a recent low of $1.4097 on May 25.
