Quarterly Business Analysis Quarter 4 2007
Intense Feedstock Cost Pressure Hits Petrochemical Industry Profitability at Year End
The relentless surge in feedstock costs which has burdened petrochemical producers throughout 2007 intensified in the final quarter of the year, as crude oil prices advanced towards $100 per barrel. Surging crude oil markets were rapidly reflected in the price of petrochemical feedstocks, with both naphtha and LPG trading at record highs through the final quarter of 2007. Petrochemical prices displayed much more inertia to the rising crude markets in quarter four, as demand slowed following a succession of major price rises since the start of the year. With fragile demand, as consumers minimised stocks towards the year end, margins came under severe pressure.
Crude Oil and Petrochemical Feedstock Prices
(United States, quarterly average)
Crude oil markets have ended 2007 in a very buoyant manner. Crude oil prices posted a succession of record highs through the quarter, as prices accelerated past $80 per barrel in October and $90 per barrel in November. WTI crude prices fell just short of the psychological $100 per barrel mark on a number of occasions. Brent crude oil prices averaged $93 per barrel through November, ending the year more than 70 percent higher than a year earlier. Crude oil prices rallied as the weakening dollar prompted investment funds to move into the oil futures market. Frequent reports of falling inventories added further support to crude prices.
Surging crude oil markets propelled petrochemical feedstock prices to record highs in the closing quarter of 2007. Average naphtha prices through October and November increased some eighteen percent over the full third quarter average, to settle just short of $800 per ton, mirroring the underlying rise in crude oil prices. Moving into December, naphtha prices strengthened to all time highs, with trade reported in excess of $850 per ton in Western Europe. Gas feedstocks strengthened considerably relative to naphtha, on tight supplies and peak seasonal demand in heating applications. Ethane and propane converged to near parity with naphtha, removing the cost advantage that many flexible cracker operators had experienced over the last two years.
Regional Petrochemical Industry Cash Margin Index
Producers of commodity petrochemicals found themselves squeezed between strong upstream feedstock markets and lengthening downstream derivative markets towards the year end. Petrochemical markets drifted wider as the supply base improved, following the conclusion of a busy period of maintenance, whilst demand eased as many consumers focused on minimising year end inventories. In the first three quarters of the year, producers were largely successful in preserving margins against mounting feedstock costs, by passing costs downstream in a timely manner. The weakening market situation in quarter four prevented producers from continuing the run of price rises successfully negotiated through the first three quarters of the year, just at the time that they were exposed to the greatest increase in feedstock costs of the year. Profitability of the petrochemical industry eventually buckled towards the end of the year, with average margins falling to their lowest for two years.
Cracker operators in Western Europe were particularly exposed to the elevated feedstock cost pressure, due to the prevalence of quarterly olefin contract prices. Quarter four contracts settled towards the end of October, with modest gains of €20 per ton in ethylene and €10 per ton in propylene, whilst Butadiene prices slipped €27 per ton. Naphtha prices promptly accelerated, moving from close to $700 per ton at time of settlement to $850 per ton by the end of November. Despite a five percent devaluation in the dollar from quarter three, the average cost of acquiring naphtha through November still increased almost €170 per ton above the feedstock cost for the full third quarter.
As feedstock prices climbed to new highs, late in the quarter, margins at West European crackers were almost entirely eroded. Rapid deterioration of cracker economics caused Nexant’s base petrochemical margin index to slump more than 35 percent, to settle at 160 (Q1 1984=100), the lowest since the start of 2006. The only sector of the industry to resist severe margin erosion was the intermediates sector, where extreme tightness in global MEG markets boosted margins, contributing to a modest three percent gain in Nexant’s West European intermediates margin index.
Petrochemical Industry Sector Cash Margin
(North West Europe)
Nexant's "Quarterly Business Analysis reports" review regional trends in production economics for commodity petrochemicals and polymers in Western Europe, United States and Asia Pacific. The reports are published as part of ChemSystems/Petroleum and Petrochemical Economics Programme (PPE).
For further details please contact Andrew Powell at +44 207 950 1576 or email to apowell@nexant.com
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