Phenol Producers Seek Major Increases

20 March 2000 00:00  [Source: ICB Americas]

By Karl Greenberg

After several quarters of pricing roll-overs and negative margins, phenol producers are committed to achieving gains for the second quarter of 2000. Although some pricing proposals include temporary voluntary allowances (TVA) to allow for flexibility after April, most producers have nominated what amounts to an 8-cent-per-pound increase for April 1. Yet analysts caution that even though raw material costs have escalated so rapidly that even an 8 cent gain may not raise phenol above its cost floor, buyers are resisting nominations of more than 5 cents.

Shell says it has completed its 500-million-pound-per-year expansion at Deer Park, Tex., and is running at full rates, and sources say Phenolchemie will be on stream with 970 million pounds of phenol by the end of March. Strong demand from resins, caprolactam and polycarbonates is keeping the market tight; short supply is also being sustained by strict production schedules caused by poor profitability.

"March is probably the worst economic-margin month in the history of the business," says Ben Smith, aromatics consultant at CMAI in Houston. "It's not viable to build inventory under these conditions, so producers are scheduling volumes during the month to satisfy customers and no more."

A market participant concurs, noting that two producers are holding consumers at contract levels, and another has told buyers that it is not going to supply at more than 1999 contract volumes.

Market players say that both Dow and Aristech have announced an 8-cent-per-pound increase for second quarter phenol contracts, and Shell has proposed 11 cents, with a 2 cent TVA, for a net increase of 9 cents per pound for April 1.

JLM removed its 5-cent-per-pound TVA from its first quarter nomination in March and has put an additional 6 cents on the table for the second quarter, with a 3 cent TVA, for a net increase of 8 cents per pound in April. Other producers nominated a straight 8 cent increase.

Yet producers say that even if they get 8 cents in the next quarter, they will still be at their cost floor through May, depending on the direction of raw material pricing.

Benzene's 45-cent-per-gallon increase since December, from $1.05 to $1.50, has raised phenol costs by about 6 cents per pound. Benzene's 20-cent-per-gallon increase between February and March amounted to nearly a 3-cent-per-pound hike in phenol costs in one month.

In December, before the current spike in feedstock costs began, producers had already borne margin losses for 15 months, beginning in the fourth quarter of 1998. By the end of last year's second quarter, when benzene was 83 cents per gallon and cumene was 15.5 cents per pound, producers had lost 12 cents in margins during the nine months since October 1998 (CMR, 6/7/99, pg. 4). Mr. Smith estimates producers have faced negative margins since September 1999.

"March is the seventh month in a row for a cumene purchaser to be in negative total cash cost economics," he says. "The April increase, combined with the acetone increase, will not be sufficient to get producers above negative operating margins, so April will effectively be the eighth month, running, of negative operating conditions, with a likelihood of continued negative margins well into the second quarter."

"This is the first year in the history of JLM that we have had to report losses," adds John L. MacDonald, president of JLM Industries, which has a phenol nameplate of 95 million pounds per year at its Blue Island, Ill., facility.

"The company had to report a 50 percent erosion of its manufactured products' selling prices concurrent with a 170 percent runup in energy and feedstock costs. We have had to witness a 50 percent erosion in prices," he notes.

However, a buyer says that despite the pressures on phenol producers, many customers will balk at 8 cent nominations. "They'll want 5 cents. Anybody would. But anybody watching what benzene is doing knows benzene isn't covered at 5 cents," he says.

Several producers are planning maintenance turnarounds in the coming months. Assuming continued strong demand, these should offset the impact of this year's expansions.

"The turnarounds will have the potential to keep things tight for the time being, for both phenol and acetone," says Mr. Smith. Observers say three producers will take turnarounds in April. Sunoco will take a scheduled turnaround in May.

But even with strong demand--with polycarbonates growing three times as fast as GDP, and phenolic resins posting 3 to 4 percent growth in 1999--Mr. Smith says the market will need at least a year and a half to absorb the more than 1.4 billion pounds of new capacity due on stream from expansions during the past six months.

"There is great downstream demand. As long as that stays strong, the market will adapt," he says. But he cautions that difficulties will arise if the economy slows because of high interest rates and inflation. "If housing and autos stall, that will take out phenolic resins, which constitute one-third of demand."

Analysts speculate that because the market is tight in Europe, Phenolchemie and other producers will ship material there and elsewhere once US supplies lengthen later in the year. Strong demand for nylons and polycarbonates, coupled with outages, is keeping the European market tight.

Since the beginning of the year, EniChem SpA's 105,000-metric-ton plant in Porto Torres, Italy, has been down for an expansion. That turnaround is expected to last until May, according to London-based Tecnon UK Ltd.

Phenolchemie's plant in Gladbeck, Germany, was down for three days this month, and a strike at Rhodia's plant in Rouissillon, France, took that unit off for three days.

An analyst says that Ertisa SA in Palos de la Frontera, Spain, had downtime late last year but is back at full rates. Tecnon says Borealis Polymers, Finland, is facing a labor strike that could close its plant for three days later this month.

"It all adds up," says a Tecnon consultant. He adds that Rhodia plans to shut one of its phenol lines during the third quarter.

Because Europe has benzene-plus contract agreements, its producers have been able to recover benzene cost increases. Mr. Smith notes that the resulting gap between US and European prices has opened opportunities to move product across the Atlantic. "The coming price increase in the US will close that gap," he says.

Market participants say the long-term question is how long poor profitability can continue before phenol producers balk at adding new capacity as the market grows.

"The question is, if things continue negative for three more months or six more months, will there be anybody with funds available or the desire to announce the next increment of new capacity beyond Solutia's proposed plant," says Mr. Smith.

He says that, in the end, it is a consumer issue. "Customers are likely to suffer if no one builds a plant to be on stream by 2004 or 2005, when supply is needed and prices are up. The question is, how long can the industry lose money before no one will invest?"

A producer concurs. "There won't be any new capacity that I can see coming up if things remain the way they are. I'm sure not taking any proposals for new investment in 2001. You just aren't going to go in and get shot full of holes and say, 'Well, the industry needs a new plant' when they aren't paying you for the one you've got."

BTX--Benzene spot prices have dropped slightly because of lower crude values. April deals have been conducted at $1.40 to $1.44 per gallon, and April toluene deals have been done at $1.09. An analyst says xylenes are being talked at less than $1.10 per gallon and as low as $1.06.

CORRECTION--A March 6, 2000 article on diphenyl-methane-diisocyanate (MDI) lists Bayer Corporation's MDI capacity as 110 million pounds in New Martinsville, W.Va., and 370 million pounds in Baytown, Tex. The company says its annual MDI capacity is actually around 160 million pounds in New Martinsville and 505 million pounds at Baytown.

ETHANOL--Midwest Grain Products Inc. is raising its off-list prices for all industrial grade 190 proof or anhydrous ethanol, effective April 1. The company says it is responding to higher costs for freight and raw materials.

FORMALDEHYDE--Effective April 1, 2000, Celanese will increase its North American selling prices for formaldehyde by 1c. per pound. Butyl Formcel and methyl Formcel will also go up by 2c. per pound in the US, Canada and Mexico.

ISOCYANURATES--Occidental Chemical Corporation is increasing its off-schedule prices for all grades of chlorinated isocyanurates by 10c. per pound, effective immediately for spot customers and as terms permit for contract customers. The company says the increase is driven by price erosion and rising costs for operations and raw materials.

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