Spot ethylene prices jump out of sync with naphtha, PE prices in Asia

Limited ethylene availability and strong PE demand in the H1-January in Asia, sparked off a rally that propelled spot ethylene prices by almost US$200/ton since the New Year holidays, as per ICIS. Interestingly, spot prices for upstream naphtha and downstream PE have failed to witness corresponding jumps in price, creating an imbalance in the market dynamics. At the beginning of January, spot ethylene prices stood at US$1155/ton CFR Northeast Asia. In the first week of 2010, prices spiked nearly US$85/ton to end the week at around $1240/ton CFR NEAsia, as a number of cracker shutdowns in Asia combined with rapidly rising PE prices in China ensured healthy buying interest. Persistently tight ethylene availability pushed prices up another hundred dollar to near US$1350/ton CFR NEA for most of the current week. Although buying interest has waned recently as downstream PE producers complain of unworkable production economics, traders have as yet been unwilling to reduce their prices as they say that supply remains insufficient even after considering the effects of reduced buying from PE producers. Although the month began with a strong rally in Asia’s PE market, the decision of the Chinese Central Bank to raise its reserve requirements and reduce lending amounts has considerably dampened buying interest over the past week, while lackluster demand from converters along with unworkable production margins has lead some PE producers to consider cutting their operating rates and begin making sales out of their ethylene inventories. Spot ethylene at US$1350/ton CFR NEAsia implies a theoretical break-even price of US$1500/ton CFR China for PE producers. Spot PE prices to China are currently being reported at US$1490-1650/ton for LDPE film, US$1370-1520/ton for LLDPE film and at US$1280-1410/ton for HDPE film, all on a CFR China, cash basis, which implies that most HDPE and LLDPE film producers are operating with negative margins at present, with the low end of the HDPE film price range being reported below spot ethylene costs. While theoretical cost calculations imply that PE producers are operating well below the necessary break-even price, the spread between spot ethylene and spot naphtha prices suggest that ethylene producers are enjoying comfortable margins at the current price levels. Spot naphtha prices began the month at around US$730/ton CFR Japan before rising as high as US$770/ton during the middle of the month before sliding back down to prices close to the early month levels of US$727/ton CFR Japan on Wednesday. These figures indicate that the spread between spot ethylene and spot naphtha prices began the month at a comfortable level of US$425/ton before swelling to the current figure of US$623/ton, a number ensuring strongly favorable margins for ethylene producers.