Waiting for the next wave

09 April 2001 00:00  [Source: ACN]

Acrylonitrile producers are hoping that production cuts will help them ride out the current trough in the market. But downstream demand is weak and markets are potentially oversupplied for the full year, reports Malini Hariharan

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What goes up has to come down. When acrylonitrile spot prices shot up to around US$1000/tonne in Q3 last year, nobody in the industry doubted they would fall. But what has surprised producers and buyers is the speed at which prices have declined. On average, spot prices dropped by US$30-40/tonne every month in Q4 and the slide has been faster in Q1. The startup of Formosa Plastics Corp's (FPC) 200 000 tonne/year plant in Taiwan and Solutia's 250 000 tonne/year plant in Texas, the US, in H2 2000 changed the demand and supply equation and the downtrend was widely foreseen. 'But the reversal in prices and margins has been faster than anticipated. We did not foresee the slowdown in demand or the exceptional energy prices,' says one producer. Natural gas prices in the US touched historical highs in Q4 and had an inevitable impact on production costs for acrylonitrile producers.

And demand from acrylic fibre and ABS producers weakened during Q4. 'Asian acrylic fibre operating rates dropped in mid-November and we did not immediately realise the magnitude of this drop,' says a second producer. The average acrylic fibre operating rate in Q4 is put at 82%. Asian ABS operating rates also dipped in December to an average of 77%, a 10-12% reduction from the previous month. Another factor which helped bring down acrylonitrile prices was that Chinese New Year was earlier than usual this year. Acrylonitrile sellers discovered that the usual December to March seasonal lull in demand started earlier, in November. Buyers were quick to react once they sensed that prices were on the decline. Purchase volumes were quickly cut as buyers were confident that prices next month would be lower. In fact, price ideas were revised downwards after almost every deal. The poor sales in Q4 resulted in a sharp increase in producers' stocks. The second producer estimates global inventories rose to 400 000 tonne, equivalent to one month's demand, by the end of 2000.

In mid-2000, stocks were at record low levels, but today they are at least average or above average and most of them are in the hands of producers, says an industry observer. Stocks were estimated at a week's consumption in August 2000 (ACN 14 Aug, p10).

Given the surplus, spot prices were the first to fall. But contract prices quickly moved in line.

Higher spot availability from Eastern Europe and Russia helped buyers negotiate lower prices every month. Some buyers said they paid as little as US$620-630/tonne cfr SEA in early March for April cargoes, although there are suppliers who doubt whether business was settled below US$650/tonne.

Buying ideas have since climbed to US$680-700/tonne cfr Asia, but this is still well below the US$800/tonne cfr Asia buyers had paid in early January.

Importantly, the spot market, which accounts for only 10% of the global acrylonitrile market, has become the price leader. Asahi Kasei Corp decided to suspend its contract price notice in January due to 'confusion' in the market (ACN 22/29 Jan, p36). This was the first time the company had suspended its price notice since its introduction in November 1999. It recently resumed giving its price idea and has announced US$720/tonne cfr Asia or higher as its price expectation for March and April.

'Acrylonitrile prices today are way below cost and nobody is making money,' declares the second producer. 'We even need by-product credit to justify our acrylonitrile business, which is quite unusual.'

He points out that an Asian producer would be able to cover only current raw material costs and freight costs if acrylonitrile prices are US$700/tonne cfr Asia. A European or US producer would need at least US$725/tonne cfr Asia and, at current spot prices, no producer will be able to cover costs.

Margins have certainly evaporated and for producers, it seems that they have stepped back in time to the miserable markets of 1997-99.

However, the industry observer believes producers are worse off this time. Current margins are far lower than in the last downturn and are terrible for spot business, he says. This is because, compared to 1998, producers now face high propylene and ammonia costs. Suppliers agree that the margin squeeze this time around is as bad as or even worse than what it was two to three years ago.

They are all clear that the situation cannot continue. A few have refused to sell at some of the prices that customers are asking, and many have decided to lower output in the hope that this will stem the price slide.

'A production cut is the only way to meet demand', says the second producer. 'Furthermore, we have to remember what happened in 1997-98. Two uncompetitive plants with a total capacity of 190 000 tonne/year were forced to shut down. This time, too, we believe that at least three more plants, with a total capacity of 220 000 tonne/year, will have to consider permanent closure.' No announcements have been made and the focus now, is to reduce production to ensure balanced markets.

Compared to last year, a US producer says it dropped production by around 15% in Q1 and plans to maintain this low operating rate if the marginal cost to sell is uneconomic.

Tong Suh, in South Korea, and Cytec, in the US, were also reported to have run their plants at reduced rates during Q1.

Asahi Kasei lowered the operating rates at its two plants in Japan by an average 12% in Q1. It says production in Q2 will be reduced by 13% at its 250 000 tonne/year Mizushima plant and by 13% at its 150 000 tonne/year Kawashima plant. It admits it may have to introduce further cuts if competition intensifies or if demand slows down. Sterling Chemicals brought forward the shutdown of its 360 000 tonne/year plant in Texas City, the US, from Q3/Q4 to mid Q1.

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A few plants also encountered operating problems. FPC's plant was shut down in early February and the company restarted both lines in early March. In the US, Solutia was forced to stop production at its Texas facility in February due to a major power outage.

The second producer estimates that approximately 250 000 tonne of production was lost in Q1 and that global operating rates averaged 78% if plant troubles and turnarounds during this period are also considered.

He anticipates that around 200 000 tonne of production will be lost in Q2 due to turnarounds in the US and Europe and production cutbacks. This represents 14% of world capacity. He points out that in H1 2001 only 84.5% of global capacity will be available for production. This is below the estimated demand during this period.

Further support could be forthcoming for acrylonitrile producers if Chinese producers decide to divert propylene to more profitable PP operations. Acrylonitrile imports would then increase. China imported 150 000 tonne in 2000 and this figure is expected to rise to 190 000 tonne this year. The second producer says that if Chinese companies cut production, China could import 210 000 tonne in 2001.

He adds that Chinese acrylic fibre producers are perhaps the only ones enjoying profitable operations and will therefore not cut production or acrylonitrile purchases.

But will the reduction in acrylonitrile operating rates globally be enough to reverse the price trend?

The answer is not easy as a lot will depend on how demand shapes up in the coming months.

The decline in gross domestic product (GDP) growth in the US has, without a doubt, clouded demand prospects. Consumer confidence in the US has weakened in the past few quarters and there are concerns that major sectors such as housing and automobiles will perform poorly this year.

Despite hopes of a sharp recovery in H2, everybody is worried about a global economic slowdown.

'PCI was originally looking at 4% growth in global acrylonitrile demand this year. But we now say it is likely to be closer to 2-3% at best due to the slowdown in the US and therefore the global economy,' says Simon Garmston, of PCI-Fibres & Raw Materials.

The second producer forecasts 1% growth as the worst-case scenario.

He believes that with all the bad news emerging almost daily from the US, everyone is looking at markets with a depressed view. Buyers agree and say demand recovery in acrylonitrile, acrylic fibre and ABS is unlikely to be easy or fast.

Last year, ABS demand in China grew by 15%, but over 50% of Chinese demand was for re-export mainly to the US. Developments in the US are expected to have a knock-on effect on Chinese demand. 'There is a lot of nervousness in ABS markets in Asia,' says the industry observer.

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A pessimistic estimate for Chinese ABS demand growth in 2001 would be 5% while an optimistic estimate would be 11.5%, says the second producer.

And although ABS production rates are currently at a good level in most countries, it is not clear if this is real demand or perceived demand, says the first producer.

As for acrylic fibre, demand in China is growing slowly and mixed views are being presented on prospects for this year. PCI currently estimates Chinese demand will grow by 4.5% in 2001. However, Garmston says this growth rate will soon be reviewed downwards. A Japanese acrylic fibre producer forecasts 2-3% growth.

Concern is also being expressed in some quarters that fibre stocks in China are too high.

One acrylic fibre producer believes there has been a build up of inventory and estimates that stocks were as high as 60-80 000 tonne at the start of the year, compared to 30 000 tonne in January 2000. This assessment is based on the higher than usual imports by China last year. Imports in 2000 were 340-350 000 tonne, up from 263 000 tonne the previous year. However, Chinese acrylic fibre mill demand is estimated at around 800 000 tonne, and 80 000 tonne stocks represents just five weeks' consumption. The stocks are not a 'disaster', points out the industry observer. A second acrylic fibre producer agrees and says its major concern now is how to cope with buyers' requests for price reduction.

Falling acrylonitrile prices have put pressure on acrylic fibre. But the overcapacity in the acrylic fibre industry has also resulted in intense competition.

Buying ideas dropped to US$1.10-1.15/kg in early March. And despite the fall in acrylonitrile costs, acrylic fibre producers have been unable to realise any significant improvement in their margins.

The price differential between acrylic fibre and polyester is at an uncomfortable level and is certainly not helping acrylic fibre consumption, says the industry observer.

In response to oversupply in their markets, many acrylic fibre producers have implemented production cuts. But they are optimistic that the seasonal upturn in demand will materialise in Q2 and that further cuts in production will not be needed.

The acrylic fibre industry has not been healthy for a number of years and production cuts may not be the only answer, says the first acrylonitrile producer. Some permanent restructuring was carried out last year. This year, Sterling Fibre will close its 65 000 tonne/year plant in the US. But further restructuring is needed. Moving back to acrylonitrile, there is hope that prices will not deteriorate any further. The first producer says: 'Margins can't get worse than they are now since they are non-existent.

'The only question is when they will recover and that depends on the rate of demand recovery, the reliability of acrylonitrile plants and regional feedstock prices.'

Plant reliability is an important factor. In 1999 and 2000, operating problems in all regions tightened global supply. It is estimated that close to 180 000 tonne of production was lost from Q3 1999 to Q2 2000 (ACN 14 Aug, p11).

As for feedstock costs, with natural gas costs coming down in the US, propylene and ammonia prices have shown signs of easing. In Asia, higher availability has put propylene prices under pressure. Acrylonitrile producers can therefore hope for some relief on the cost front. But for margins to improve, producers will need to hold or hike prices. This could be a difficult task, as any drop in feedstock costs will certainly result in buyers clamouring for a further reduction in acrylonitrile prices.

So when will prices and margins recover?

In the medium term, the demand and supply balance will change after 2003, asserts the second producer. He believes operating rates will climb to 96% in 2004 and 2005. This is based on the assumption that some of the uncompetitive plants will be shut down and demand growth will recover to 2.5% during 2002-05. He points out that the markets will return to a balanced position sooner, if demand grows at the usual rate of 3%.

But in the short term, the adjustments in operating rates currently being carried out and any unexpected shutdowns could result in better-balanced markets in Q2, believes the first producer. For H1, producers have planned adjustments in supply and there is a chance of price recovery. If demand improvement is faster than expected, prices should rise quickly, says the second producer. However, weak fundamentals put H2 in question.

Markets are potentially oversupplied for the whole of 2001, but the balance should be better in Q3, states the industry observer. Demand should improve and absorb some extra supply.

And when the recovery does take place, producers hope prices will climb just as fast as they declined in the past two quarters. After all, what comes down also goes up - at least for petrochemical prices.

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