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European Olefins & Polymers: The price recovery is underway -- but what about margins?

By Ilana Djelal

October 1, 2009 - Breathing the life back into the European olefins industry in 2009 after the harrowing Q4 of 2008 proved to be a hard challenge for both producers and consumers alike, requiring a great deal of discipline, commitment and patience.

The attempt to restore profitability and operational margins for European steam crackers operators became almost a form of alchemy in its true original meaning - “al-kimia” or the art of transformation. (See a related chart: Platts cracker margin ($), February 2008 - August 2009.)

It seemed that nothing short of magic would work. A high degree of skilful fine-tuning was required to restore steam cracker operational rates from the bare technical minimum tolerance levels reported in Q4 2008-Q1 2009 to something more sustainable for the rest of this year.

A right dose of good downstream demand, manageable feedstock costs and careful increases in prices to restore margins were needed to stimulate the market back to life.

“The idling of various European assets for periods of 2009 has highlighted the vulnerability of managing a balance in addition to the complex economics of the cracker system,” one ethylene consumer said.

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The year proved to be challenging as recovery of volumes in the downstream polymer markets were gradual. In some segments, this volume recovery was sporadic and often merely led by a brief restocking frenzy by converters or traders.

Traditional seasonal behaviour in European polymers somewhat deserted the market in 2009, as polymer production cycles shrunk while purchasers behavior turned inherently cautious.

At the height of the financial crunch in 2008, availability of credit insurance was severely reduced thereby straining payment terms for buyers and restricted spot liquidity.

As the market shrunk, market participants had to redefine trading partnership and establish new framework with counter-parties. “In 2009, I can only trade with 50% of my usual customers as the rest do not have credit insurance,” a polyethylene trader said.

“Having a healthy balance sheet became the main commodity to have in 2009, ensuring your competitiveness,” one polyethylene converter said. “Most financially reliable customers get all the competitive offers from everyone now. Everyone is trying to sell to the accounts where there is a guarantee of a payment and less risk exposure,” a PE producer said.

Inventory management became increasingly central to the functioning of the entire olefinpolymer value chain. Prolonged running at reduced rates by plant operators became a constant feature in 2009, most pronounced in the polyethylene market.

PE producers ran their plants at around 80% utilization rates for most parts of this year as demand for the products weakened as the recession bit end-user markets.

However, as feedstock values remained high, together with polymer producers’ inability to run their plants at full capacity to maximize investment costs, PE producers hardly managed to recover fixed costs.

PE converters, on the other hand, faced the challenge of managing inventory in the face of weak consumer markets.

They were unsure of how much to order and how long of a lead time was needed from orders to final product, keeping one eye on fragile consumer confidence and another eye on upstream price volatility.

With the overhang in global physical PE volume heading to Asia, this somewhat shielded the European PE markets from experiencing a price crash.

European PE exports were particularly healthy during Q2 2009 and the first half of Q3, but subsided towards the end of Q3 as the Chinese downstream markets turned increasingly ambivalent.

Delays in the arrivals of polymers from new Middle Eastern plants also allowed the European industry to regain a degree of composure.

Nevertheless, the challenge to sustain decent operating rates at steam crackers and adjacent polymer plants while attempting to restore profitability was ongoing.

Margins for integrated producers remain critically low, with PE margins particularly emaciated.

Next page: Downstream margins see little improvement despite constant price rises

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