Panic buying boosts demand for single-use packaging
While refineries close or cut runs, petchem margins surge
Petrotahlil — Unlike European refineries, which have been cutting runs or shutting as COVID-19 destroys demand for oil products, the petrochemical industry has been kept ticking over by buying of plastics for hygiene products and single-use food containers.
In April, Austria's OMV said it had converted its production in favor of petrochemicals due to weaker demand for jet fuels.
While OMV had to revise down its anticipated refinery margins for 2020, it revised up its petrochemical margin forecast.
Meanwhile in its Q1 results this week, French oil major Total said its refineries in Europe were running at around 60%.
By contrast, demand for plastics has supported petrochemical volumes, which have not been "affected by the crisis", Total said. "Thanks to the flexibility of steam crackers" they can "benefit from low cost naphtha and ethane".
"Cracker operating rates are the highest not only in Asia but also in Europe because of the low naphtha cost resulting in a high margin," one petrochemical trader said.
While refineries in Europe have been bringing maintenance forward to offset the impact of low demand, cracker operators have postponed turnarounds "to benefit from the extra profits now", the trader said.
Shell's cracker turnaround at Wesseling, Germany, scheduled to take place between mid-April and beginning of June has been postponed until the third quarter.
Shell has also decided to postpone planned works its Moerdijk cracker in the Netherlands, but brought forward the maintenance of its nearby Pernis refinery.
Weak demand has resulted in some refineries in Europe closing or reducing throughput at their gasoline-producing FCC units.
Russian refineries have been increasing naphtha output while reducing gasoline, which has been hard hit by travel restrictions.
Hungary's MOL said in April its refineries were running at 70%-75%, compared with 90% for its crackers.
OMV said while it was running its European refineries at around 80% due to the significant decline in oil products demand, "lower costs of the feedstock mix" meant the Q1 contribution of its petrochemical business rose 32% year on year. The company also reported higher margins for benzene and ethylene.
European naphtha-based polyethylene producers have seen consolidated margin expansion since February. Before that they were incurring losses.
Margin have risen more than Eur100/mt ($108/mt) for polyethylene, the first time resin producers have been able to achieve that since the November 2018-April 2019 period, according to S&P Global Platts data.
The margin increase has been attributed to strong demand for flexible packaging since the start of the lockdowns as well as to low feedstock prices.
Naphtha CIF NWE hit $107.75/mt on April 21, the lowest in S&P Global data going back to March 1999, after tracking the broader oil complex lower.
Tumbling oil prices have shifted the advantage towards naphtha-based European producers, petrochemical market sources said. LPG, another petrochemical feedstock, also lost its high premium to naphtha.
Meanwhile, restrictions European countries introduced to combat the spread of the coronavirus pandemic spurred demand for flexible packaging for food, cleaning and pharmaceuticals, which somewhat offset the standstill in the automotive industry, a trader said.
Lower feedstock costs and a slowdown in imports have helped to boost margins, rebalance the market and reduce competition.
"The bulk of buyers are dependent on European production and there are no imports from...the US," another source said.
Although cracker co-product butadiene has seen prices tumble amid a sharp downturn in demand from the automotive sector, that has been offset by ethylene and propylene which have seen support from their downstream polyethylene and polypropylene markets as consumer concern about single-use plastics has dwindled and packaging demand has remained strong.
Between late February and April, as consumer panic buying spread across Europe and spurred demand for food packaging and personal hygiene products, resin producers' fortunes turned around.
"There is more demand for packaged foods, which is different from the environmental trend towards unpackaged products we were seeing before," a petchem trader said, adding: "Now people are buying packaged products because of this crisis".
S&P Global Analytics data also confirmed that "global petrochemical production remained robust in Q1 despite the coronavirus-induced economics slowdown", according to Mike McCafferty from Platts Analytics.
However, as countries start easing restrictions, the situation was expected to change.
"Of course, this situation is extreme and will not last forever," an ethylene consumer said.
Recently, PP producers have noted that demand for food packaging applications was returning to pre-coronavirus pandemic levels as consumer panic buying diminished.
Platts Analytics said it expected polymer demand to come in slightly lower in 2020. "Global ethylene and polyethylene operating rates will need to fall significantly in the second and third quarters of the year in order to prevent a major supply overhang and inventory build," McCafferty said.
Meanwhile, the access to cheap feedstock might not last much longer as with the easing of travel restrictions, gasoline demand was expected to surge and that will boost demand for naphtha, which is a primary blendstock.
Naphtha values have been firming over the past week. S&P Global Platts assessed CIF NWE Naphtha at $183.00/mt Wednesday, up $46.25/mt on the week.
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