Ethylene demand concerns remain ahead of European March contract talks

The European ethylene market is set to enter March with a supply overhung stemming from sluggish domestic downstream demand, exacerbated by the recent coronavirus outbreak.

With the Asian market closed to ethylene due to the effects of the coronavirus virus on Chinese industry and transport hubs, the European surplus remained stranded and talk of cracker run cuts emerged in recent weeks.

"I do not think March will be much better", a source said. "Cracker rates are definitely reduced already."

European cracker margins overall are sharply higher than previous months, but most of the gains again were the result of the coronavirus, which has pulled down prices of crude and upstream raw materials. European spot cracker margins averaged Eur294/mt in February, from a January average of Eur201/mt, according to S&P Global Platts data. In the contract market, gains were even higher, with February margins averaging Eur541/mt, up Eur158/mt from January averages. Due to the coronavirus outbreak, European naphtha spot prices have fallen 14% since the start of the year to $458.25/mt CIF NWE Monday, Platts data showed.

Downstream demand will remain a key element in contract price discussions in March, alongside typical feedstock talks, ethylene market sources said. Upcoming cracker maintenance works might also lend support, market sources said. Spring cracker works in Europe include Dow Tarragona, Sabic Wilton, INEOS Dormagen and Shell Wesseling units. Exxon's ethylene plant at Mossmorran, Scotland, is in the process of restarting, with a potential return to the market in March, sources said, which will add to the supply side.

KEY DERIVATIVES SEEN OFFERING SCANT SUPPORT

European polyethylene producers struggled to pass on average increases in February contracts. Producers had sought increases of up to Eur30/mt at the start of the month, with an expected re-balancing of ethylene supply leading to a firmer March CP. This did not happen, and the impact of the coronavirus outbreak on energy markets as well as Chinese production and logistics systems meant global demand for polyethylene depressed sentiment, with buyers unwilling to commit to greater volumes, amid solid inventories.

Although the most balanced PE grade, low density grade spot prices were assessed at Eur965/mt Monday, up Eur15/mt on the day, while HDPE film fell Eur10/mt to be assessed at Eur920/mt FD NWE.

Polyethylene markets were under pressure from expectations of oversupply, with material expected to arrive from both the US and the Middle East as producers eye Europe again amid a lack of import demand from the Chinese market, sources said last week. "There is plenty of material coming from everywhere," a trader said.

PE converters pointed to the impact of the coronavirus on certain PE grades. "The [global] economy is dependent on the Chinese market," a converter said last week "We have to see what ethylene is going to do [but] I am not optimistic."

"High density is less strong...and a rollover is the outcome," a producer source admitted.

For ethylene glycols, the impact of the coronavirus was telling. The typical CIF barge-FCA truck spread inverted to put barges at a premium over trucks, as demand for spot barges surged after buyers sought alternative supply to contract volumes. "Lots of cargoes will arrive in March, dampening prices, but on the other hand there is not that much demand for FCA," a trader said last week.

Ethylene glycol trucks were assessed at Eur470/mt FCA NWE Friday, while barges were assessed at 475/mt, down Eur5/mt on the week.

Sources said the truck market remained under pressure, with buyers seeking lower prices. "There is some softening but prices are already so low that it wouldn't make any sense. No one is happy with these prices," a distributor said last week.

A monoethylene glycol producer said prices could fall, "but not to the level of Eur400/mt. It's difficult to predict."

Although prices were still under pressure from a combination of weak demand and supply length, a deal to include glycols as part of a US-China trade deal could see some of that pressure ease, according to market sources.

UPSTREAM VOLATILITY, CORONAVIRUS IMPACT PULL NAPHTHA CARGOES TO ASIA

In the upstream complex, the European naphtha market is potentially set to begin March with a divergence -- in terms of market activity -- with the Mediterranean tight and Northwest Europe much quieter. Med tightness has become even more pronounced in the latter half of February as it provided the required volumes to satisfy Asian demand in light of Middle Eastern refinery turnarounds. However, this tightness is likely to ease going into March, market sources said, as some Middle Eastern supply returns and Asian demand falls due to the coronavirus.

"I believe the full impact of coronavirus news on the naphtha market has not yet been seen as it takes more time for products with a long supply chain to fully reflect market information," a market participant said.

Northwest Europe is leading the European market under normal conditions, but has shown limited market activity and demand as February ends. However, the Northwest European naphtha market is expected to recover, according to market sources, reducing the divergence with the Mediterranean. Spot prices for CIF NWE naphtha cargoes have averaged $475/mt so far this month, from $527/mt in January, Platts data showed.