Cracker margins under pressure

PE aug08.jpg
Paul Ray’s excellent ICIS PE margin report provides plenty of food for thought this week. The chart above shows that European LDPE prices (the red line) have moved up quite sharply since June. But almost all of this improvement has been captured by cracker operators. Margins for integrated players (in yellow) recovered quite nicely, but standalone producers (in blue) have seen only a slight improvement.

The historical perspective also tells a story. Between 2004-7, the integrated LDPE margin was very steady at around €550/t. And standalone margins were c€215/t. But since Q4 2007, both have been sliding. Integrated margins slipped below €400/t in Q4, and since January have averaged €364/t. Similarly, standalone margins fell to €200/t in Q4, and have averaged just €141/t this year.
The other problem is the increase in volatility. I spent 5 years trading feedstocks/petchems in Europe & the US Gulf. This taught me that an increase in volatility is one of the most reliable ‘early warnings’ that a price trend is changing. This is what we are currently seeing. Q1 showed a seasonal improvement over Q4, but by May, margins were back to December’s levels. And with Q3 traditionally slow, it seems unlikely that today’s improved margins will prove any more durable.
Plus, of course, there is the likely impact of the global downturn, now clearly underway. Standalone producers will be worst hit by this, as they have no cracker margin to support them. But even integrated producers will find life increasingly difficult, as refining margins come under pressure from declining gasoline markets.

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