Higher European Cracker Rates Boost Demand for Spot Naphtha

london (Platts) -- 19 Jan 2009

An increase in European steam cracker rates this month has led to a slight rise in naphtha buying interest, although underlying demand for petrochemical products has yet to demonstrate a sustained recovery from recent depressed levels, market sources said Friday.

Several cracker operators reported an increase of around 10% in operational rates in January, when compared with December.

"Our crackers are running at around 85% now," one olefin producer said, while other sources reported utilization rates of 65-80% at their facilities. "Our plants are no longer at minimal technical tolerance levels as downstream demand has picked up a little," a source from one petrochemical major said.

Ethylene off-take for January was on average also up by around 10% from December, but was still around 25-30% down from normal consumption levels, market sources said.

"The cracker margins are still very poor...but I'm very optimistic for the second half of the year; the system is finding an equilibrium and slowly restarting," said another petrochemical producer.

Platts contract cracker margins have fallen sharply so far this year on lower olefin contract values to an average of $178/mt or Eur131/mt during the first 15 days of January, compared with an average of more than $1,500/mt in December.

With margins weak and naphtha prices rising so far this month, petrochemical producers are wary of emerging too strongly as buyers of naphtha. 

The recovery in petrochemical demand is still very modest, market sources said, with some adding that they were yet to be convinced that the current uptick in consumption was sustainable. 

"There is also some re-stocking going on now in the whole production chain, as inventories were driven to very low levels in December; I am still skeptical about the recovery of intrinsic downstream demand," an ethylene buyer said. 

"Demand is still pretty relaxed in NWE," one naphtha market source said, while another said he expected to see "more spot activity in the next three weeks." Some of the main naphtha buyers in Europe are now buying at full contractual volumes again, having been trying to minimize their commitments throughout the fourth quarter of last year, traders said.

"Petrochemical end-users might buy for H2 January-H1 February if they get the right price. They don't want to chase the market if the premiums are going up," another source said, describing the recovery as "tentative."

Some sources said the increased naphtha buying activity could also be due to the fact that some petrochemical producers have reduced their contract deliveries of naphtha for 2009 or have not signed any term contracts at all, forcing them into the spot market to secure supplies.

Some other olefin producers also sounded a note of caution, saying demand for petrochemical derivatives had not yet demonstrated sustainable strength to justify a marked increase in steam-cracking rates.

"We increase the rates and start running full blast now and then suddenly downstream demand collapses again and we have to go through the whole pain of reducing cracker rates again and it's a no fun, costly exercise," one olefin producer said.

--Ilana Djelal, ilana_djelal@platts.com --Maria Gradobitova,
maria_gradobitova@platts.com

Quoted from: www.platts.com