European cracker operators suffered serious margin dents in Q2; signs of recovery visible in Q3

European cracker operators had a turbulent year seeing a 40% increase in European naphtha prices year on year in dollar terms and 25% in Euro terms.

Unprecedented levels of European naphtha which strengthened from $674.08/mt CIF NWE, or Eur490.22 (2007 average) to a current 2008 average (until August 13) of $943.68/mt CIF NWE or Eur613.24/mt, put a severe dent on European contract cracker margins, which saw record low levels during Q2.

Platts contract cracker margin index, which takes into account the quarterly contract prices of ethylene and propylene, the monthly contract price for benzene and the monthly cumulative averages of naphtha and low sulfur fuel oil and 10 ppm gasoline, saw a record low on June 23 2008 at minus $423.18/mt or minus Eur273.28 /mt.

With olefin prices settled quarterly, olefin producers could not react to a surging upstream energy complex continuing to operate in a red territory for the most of Q2.

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Some marginal cut back in cracker operational rates were seen in the market during Q2, however, due to the fact that many olefin producers operate under quarterly supply contracts to external customers and flexibility on core supplied volume is limited, cracker operators had to meet those obligations, continuing to face a staggering decline in profitability.

Some producers, who have flexibility to use LPG instead of naphtha as a feedstock, could somewhat limit the damage, however, for most naphtha still remains a principal feedstock.

In yearly comparison, contract cracker margins have dropped from an average 2007 level of $256.05/mt (Eur190.37/mt) to current a yearly average (until August 13 2008) of $108.39/mt (Eur71.61/mt).

Given the fact that for the most of 2008 Euro remained strong in relation to the US dollar, cracker operators have been marginally shielded by the currency effect as feedstocks for operating a cracker are typically bought in dollars, while the product output of a cracker is sold in Euros.

The impact on cracker margins could be even more severe had Euro been weaker.

For 2008 Q3 contracts, olefin producers managed to secure substantial increases in ethylene and propylene contract prices.

European ethylene Q3 contract prices settled July 2 at Eur1,228/mt FD NWE, Eur190/mt increase compared to the previous settlement of Q2, while propylene Q3 contract price settled at Eur1,015/mt FD NWE, Eur88/mt increase.

Given the recent downward trend in crude oil led to a softening in European naphtha market, which subsequently resulted in a healthy recovery of the European contract cracker margins.

Current contract cracker margin Q3 average, according to Platts' data is at $173.47/mt or Eur112.51/mt.

This means that crackers margins have improved by a factor of 7 in dollar terms and by a similar factor in Euro terms.

From August 1-13 contract cracker margins averaged at $360.81/mt or Eur236.92/mt.

Some olefin producers said that a normal mid-cycle cracker margin for an average European cracker is estimated at Eur200-220/mt, which means that the current August average is marginally above the targeted level.

That is up however from 2007's average of $10.15/bushel, for 2007-08, and $6.43/bushel in 2006-07.

Soybean prices reached a record $16.3675/bushel on July 3.

Created: August 26, 2008

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