US ethylene poised to trend downwards

August 2008 21:02 [Source: ICIS news]

By Stephen Burns

HOUSTON (ICIS news)--Buyers were already marshalling their arguments for a cut of 5 cents/lb or more in US Gulf August ethylene contracts as supply loosens amid soft demand and tumbling spot prices, sources said on Friday.

A fall in the August contract would be only the second decline since a steep climb began in April 2007, and it could mark the sea change that buyers have been hoping would come from the month-long reversal of crude oil's earlier rally.

In an unusual double-month settlement, US Gulf net contracts for June were finalised last week with a 5 cent/lb ($110/tonne or €72/tonne) increase to 70.5 cents/lb.

A contemporaneous agreement was reached for an increase of 4 cents/lb for July, according to data from global chemical market intelligence service ICIS pricing

Including the July increase, the net contract price at 74.5 cents/lb has now soared 89% from the April 2007 low, with a 3 cent/lb drop in February this year as the only blip in the upward trend.

Buyers pointed to improved margins and high operating rates for the loosening of supply, as well as a relatively smooth record of cracker operations.

The arrival of the relatively mild Tropical Storm Edouard near Houston on Tuesday did not dent that track record.

Only minor issues surfaced, such as a power outage that lasted less than two hours at the 200,000 tonne/year Port Neches plant in Texas operated by Huntsman.

The change in ethylene market sentiment has manifested most clearly in the spot market's deep discount to contract values.

August material moved down from a deal at 52.75 cents/lb at the start of the week to 49 cents/lb done on Wednesday, with current price ideas around 47 cents/lb. One buyer expected 45 cents/lb to be traded soon.

Downstream, sources said some polyethylene (PE) producers were quietly postponing their proposed August price hikes as monomer values sank.

However, future price indications give ethylene sellers some room for hope that the slide might not gather too much momentum. The fall in the prompt spot market has flattened the backwardation in the forward curve, with December price ideas notionally at 46.25 cents/lb, according to one broker.

That 0.75 cent/lb gap to prompt material is narrower than the 1.25 cents/lb gap seen at the end of last week.

Producers’ arguments in favour of at least maintaining contract prices are also being undermined by the slump in ethane, the dominant feedstock for US Gulf crackers.

Ethane values peaked alongside crude at around $1.50/gal in early July but have since declined by around a third and were only just above $1.00/gal as the week drew to a close.

That is even sharper than the 21% decline in NYMEX crude oil futures since the 11 July peak at $147.27/bbl.

Still, Tropical Storm Edouard - which had not even entered market consciousness two just days before it set off a hurricane alert in Houston - underscored the potential for the rosy supply picture to change.

In September 2007, another pop-up storm rapidly developed into Hurricane Humberto. That storm made landfall in east Texas and caused extended stoppages at three crackers as well as three refineries, giving an upward bump to ethylene prices.

The official hurricane season runs until 30 November.

(Additional reporting by David Barry)

($1 = €0.65)

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