Wide Spread between naphtha and ethylene in Asia reaches 2007 levels

02-Feb-10

Ethylene prices have spiked to a 17-month-high, creating the widest spread between naphtha and ethylene since 2007, as per ICIS. End of last week, ethylene was pegged at US$1310/MT FOB Korea, while naphtha stood at US$690/MT CFR Japan. This brings the spread to US$620/ton as compared with a spread of US$627/ton on 17 August, 2007 and US$667/ton on 5 January, 2007. In 2007, the global economies were in the midst of the highest economic growth in a generation. Interestingly, despite the inevitable complaints of squeezed margins by PE producers amid market-driven rate cuts and plant-idling, ICIS pricing margin reports tell a more nuanced story - Naphtha-based ethylene margins in Northeast Asia rose by US$37/ton due to weaker naphtha prices. Naphtha costs had fallen by 4.8%, offsetting a 4.6% dip in co-product values. Integrated linear-low density PE (LLDPE) and high-density PE (HDPE) margins also rose by US$30/ton and US$39/ton respectively. Thus, the incentive for integrated producers to increase ethylene sales at the expense of PE didn't seem to be that strong as of last week, despite reports to the contrary. On a non-integrated basis, standalone LDPE margins fell to their lowest level since July 2008 and average January HDPE margins were the worst since September 2004. Ethylene-PE margins have been strong because of temporary supply issues. Some ethylene traders believe that prices will decline from March because of increased supply with the start up of the 800,000 tpa Shell cracker in Singapore that is estimated to export 180,000-200,000 tpa of ethylene to export. Also, in the past few months, Shell has been buying ethylene to run its MEG plant. When the new plant comes onstream, a buyer who contributed to a tight market situation will become a significant seller of ethylene. Also the tight supply from Iran is expected to ease in the next few months, as ahost of production glitches will be resolved over the next few months, with a great deal of new capacity yet to come on-stream. On the demand side, potential for weaker economic growth in China, resulting in the sharp correction in oil and other commodity prices over the last few weeks could result in bearish trend in prices. The big factor to assess post-Chinese New Year will be the influence of China's reductions in bank lending.