12 August 1996 00:00 [Source: ICB]
Bulk chemical markets in Europe are in the doldrums as summer holiday shutdowns hit downstream demand, but it is unlikely the US market will suffer a weak third quarter, as Marjorie Walker reports.
European bulk chemical markets may be in the doldrums, but in the US the combination of plant outages, planned and unplanned, during the second quarter, and the recent Lyondell fire, suggest price weakness in Q3 is unlikely.
While European and Asian polyolefin markets have seen prices weaken, the US polyolefin market continues to strengthen and olefins, styrene and aromatics prices are unexpectedly robust against a background of weak world spot prices. There are notable exceptions, such as paraxylene, where US domestic contract prices have nosedived in Q3, but the general tone of the US marketplace is still firm.
Polymer and fibre market performance is the key to the US commodity petrochemical outlook for the second half of the year. Whereas polymers have been booming, during the first half of the year fibres markets outside the US have been disastrous, a major problem for US fibre intermediate producers and their suppliers. Both have major export business in the Asian markets.
Producers are predicting more of the same in the second half, but with the proviso that the outlook for olefins and polyolefins is likely to weaken a little as the quarter progresses. There is little indication that fibres will recover in 1996 with the best outlook the 'bumping along the bottom one', with perhaps a small improvement in the final quarter if Asian export business picks up.
US producers' confidence in the current strength of the olefin/polyolefin chain is demonstrated by their continuing push for price increases, though European polymer prices have fallen sharply and Asian markets have sunk back after a brief revival in demand and pricing.
Privately, US producers admit to being nervous about the second half of 1996, believing it will be difficult to keep up the momentum of the first half of the year. The US industry had a stronger than expected first half on the back of higher than anticipated US GDP growth.
Increased ethylene and propylene production in Q2, up 3% and 2% respectively on the previous quarter, in spite of planned and unplanned outages, has not kept pace with demand leading to a sharp fall in reported inventories. NPRA reports a 16% fall in the ethylene inventory to 675 000 tonne and an almost 20% drop in propylene to 492 000 tonne.
In these circumstances softer export demand from the weaker economies in Europe and some parts of Asia is not a major negative. The US chemical industry is largely occupied meeting domestic demand. LldPE demand rose 30%/year in the first half.
This raises the obvious question as to whether there is any serious inventory build-up within the polymer chain. 'The second half out look for ethylene and polyethylene hinges on how real the polyethylene demand growth in the first half is,' says Bob Bennet, of consultancy CMAI of Houston.
Producers claim their inventories are very low and the tightness in olefins and cracker and polymer plant problems in the second quarter support this. Inventories in converter hands are more difficult to estimate, but are likely to be considerably higher than the low levels seen late last year.
Most consultants and producers are adamant that the market will see no repeat of the polymer price collapse of early 1995. Bob Bauman, of Chem Systems, Tarrytown, NY, suggests converter inventories have built from very low levels to around 110-115% of normal mid-year and believes the second Lyondell fire and plant problems in Asia will lead converters to retain this cushion over the next few months.
The success of the July/August round of hikes had been seen as an important test of the inventory cushion held by converters and further downstream, but the Lyondell Channelview outage has probably ensured the continuing strength of olefin and polyolefin prices for a further month.
Olefins price hikes had looked as if they were slowing against a background of weakening world spot prices. The 1 cent/month price hike progression has been pulled back to a 0.5 cent/month hike under discussion for July with the possibility of a roll-over. Now 0.5 cent/lb looks in the bag for July and a 1 cent/lb nomination is in for August when a programme of maintenance outages will tighten the market in Q3 and Q4.
Balance-sheet related year-end destocking is likely to be insignificant this year as the programme of outages for the first half of 1997 is forecast to leave the industry short of ethylene.
Bob Bennet believes domestic polyethylene contract prices will peak in Q3 and domestic demand could soften in the second half. Polymer exports peaked in April after several strong months and are unlikely to strengthen much in the second half. European producers are active in the Asian export markets and offering prices below US producers' price ideas. However, China has a tendency to buy heavily in Q4 and this together with increased US availability if domestic demand slows could lead to stronger US export activity towards the end of the year.
LdPE spot export prices, which have risen gradually throughout the year, are forecast by CMAI to strengthen in the final quarter to 36 cent/lb against a weakening in domestic contract pricing from 43.33 cent/lb in Q3 to 39.33 cent/lb in Q4. However, hdPE and lldPE will experience weak domestic contract prices in Q4, but with no compensatory improvement in export prices, which will also weaken further in the final quarter.
MEG has been one of the weaker links in the ethylene chain. Weak Asian fibres markets hit demand and pricing in these products during the first half of 1996. MEG prices into Asia fell from $780/tonne CFR Southeast Asia in Q1 to current proposals of $580/tonne which have not yet achieved full agreement from Asian buyers. Producers claim prices have bottomed and with no new capacity onstream to disturb the market the only caveat is low fibre prices and producer margins, which could make it difficult to raise price levels.
Acrylonitrile producers have been putting a lot of pressure on US propylene producers to hold down chemical grade propylene pricing. So far the effect has been to limit price hikes in polymer and propylene grades in June. Moves to increase the differential between chemical grade and propylene grade prices have been unsuccessful. Recent figures suggest the worst is over for acrylonitrile producers, with inventories down 14% in the second quarter to 76 625 tonne, in spite of Q2 production being 10% up on Q1.
Bennet believes propylene prices, which have steadily increased in line with ethylene, will 'do their own thing' in the second half of 1996. Propylene's refinery links and the weak acrylonitrile and cumene markets are likely to exert downward pressure on propylene prices in the second half of the year, as will polypropylene pricing, which must come under pressure from more than 400 000 tonne/year of new polypropylene capacity onstream in the second half of the year at Phillips, Solvay and Epsilon, with a further 250 000 tonne/year due onstream mid-1997 from Exxon.
CMAI forecasts PP homopolymer contract prices will fall from a peak of 42.17 cent/lb in Q3 to 38 cent/lb in Q4. Spot numbers have been under pressure from the end of Q1 as a result of weaker export markets and by Q4 are forecast to fall to as low as 30.33 cent/lb, bottoming out in Q1 1997.
Bruce Pickover, of Chem Systems, says industry prices in H1 adjusted upwards to take account of higher crude prices. Crude prices have now come off, and he believes GDP will be lower in the second half of the year with a levelling off of prices in the second half.
The lack of confidence in styrene and paraxylene defines the outlook for aromatics for the second half of 1996, according to Bill Barry, of Houston-based consultancy DeWitt.
Barry points to the 2.2m tonne of additional styrene capacity set to hit world styrene markets in 1997... a market which outside the US has already seen prices slashed by new Korean capacity, erratic Chinese buying policies and low Asian derivative operating rates.
US domestic styrene prices have so far remained insulated from low world prices as a result of ongoing production problems, the most recent at the Chevron unit. These have kept the US domestic market tight and left little if any material available for spot exports. This is confirmed by year to date styrene production of 2.660m tonne, running slightly below the previous year, and by a 10% fall on Q1 for Q2 styrene inventories, to 303 352 tonne.
Benchmark prices to large buyers are still reported around 32 cent/lb, but this is out of line with transaction prices, which, realistically, cannot be above 27-28 cent/lb.
Once production problems have been overcome, US domestic prices will have to adjust back into line with world pricing, closer to 21 cent/lb. There is every indication that production operating rates for export units will have to be cut back to around 70% of capacity by the beginning of Q4, says Bill Barry.
The current unexpected surge in aromatics prices relates to operating problems at benzene units, principally the Lyondell outage. Benzene prices late July rose sharply to $1.05 and higher, up 10 cent/gal on the previous week while toluene rose to 80 cent/gal, partly on the back of higher MTBE prices.
But this is a temporary situation. Depending on the length of the outage prices could remain high for several weeks although by September a downward adjustment is almost inevitable, as US styrene units reduce operating rates and large volumes of Brazilian benzene head north following the closure of the 60 000 tonne/year Petroflex styrene unit.
The leap in toluene prices means the discretionary HDA capacity is again unlikely to run, with available margins at the current 95 cent/gal contract pricing level unattractive.
With the advent of MSTDP technology the paraxylene outlook also has an impact on benzene markets. Paraxylene weakness has been a factor in keeping the US market relatively snug over the past months with the major Exxon MSTDP unit off for maintenance, possibly prolonged for commercial reasons.
US domestic contract prices for Q3 paraxylene were agreed at 22 cent/lb, down 12.5 cent/lb on the previous quarter, but still a full 4-5 cent/lb above world market spot numbers. This could be even lower in Q4, says Dave Witte, at CMAI, Houston. Although the US fibre industry has not shown the weakness of Europe and Asia in H1 1996 export sales of fibre intermediates and feedstocks have been badly hit.
US paraxylene producers, particularly those with large export portfolios, are running units at 20-30% below capacity. But while Witte believes there may be a pickup in export volumes during the final quarter he does not believe this will lead to any strengthening in US Q4 contract ideas, although spot numbers may react a little.
The overcapacity, low running rates and poor profitability in the polyester business are unlikely to change for some time, however, and Witte sees paraxylene and its xylene feedstock under pricing pressure for some time, with prices basically tracking cost. Teresa Acosta, of DeWitt, points to the very difficult PTA situation in Asia where regional prices way below breakeven have already been announced for August and September. Paraxylene inventories are falling with NPRA reporting 315 000 tonne at the end of the Q2 against 328 000 tonne end Q1.
New capacity coming onstream will not help the situation. In December Mobil will bring on a 100 000 tonne/year MTPX unit at Chalmette with the larger 275 000 tonne/year unit at Beaumont onstream in Q1 1997. An additional 1m tonne of mixed xylene feed comes onstream over the next 12 months.
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