Propylene Market Struggles Against Weak Demand

07 May 2001 00:00  [Source: ICB Americas]

By John Hoffman

Whether the propylene market will strengthen or weaken over the next few months is unclear to producers and analysts, although most are pessimistic. The recent refinery outages plaguing Tosco in California and Conoco in the UK could strain supplies of refinery-grade propylene, especially if the summer gasoline season is tight. However, the demand for propylene derivatives has been weak all year, and producers generally expect that to keep propylene pricing soft.

"There are forces that could make the market stronger or weaker," notes Stephen J. Zinger, director, propylene, Chemical Market Associates Inc. (CMAI), Houston. "Right now, propylene is weak regardless of gasoline. Demand is so poor that refiners can't alkylate all the excess propylene into gasoline."

Mr. Zinger notes that during the first quarter, domestic production of acrylonitrile, cumene, isobutanol and normal butanol fell by around 20 percent because of the economic slowdown in the US and the run-up in energy and feedstock costs. In addition, polypropylene production was significantly lower during the first quarter than it was in the first quarter of 2000. "It was about equal to the fourth quarter of 2000, which was a weak quarter," he says.

"The propylene market can be summed up in one word: ugly," a producer adds. "These slumps are always V-shaped or U-shaped, so they eventually work themselves out, but we expect the market to stay weak until at least July or August."

During the first quarter, weak demand, high energy costs and the use of heavy feedslates by steam crackers triggered what producers and Mr. Zinger call "the perfect storm" for the propylene industry.

"The run-up in natural gas has made the US uncompetitive on world markets," a producer says with regard to propylene derivatives. He concurs with Mr. Zinger that the production of most major propylene derivatives has fallen by around 20 percent, and he cautions that acrylonitrile may be off by 25 or 30 percent.

"Last year at this time, the US economy was growing at around a 5 percent rate," he says. "This year, growth has been 2 percent at best. The Fed has cut interest rates repeatedly, so the economy should come back, although it's not clear how soon that will be. Hopefully, the destocking throughout the propylene chain is over. Polypropylene consumers smell that prices will come down, so they live off inventories. Once the market starts to turn, they buy again, but with such an oversupply of polypropylene, its producers can't get prices up."

Another producer notes that the polypropylene industry is running at about 85 percent of capacity. Demand for chemical-grade propylene is even weaker because of the softness of its derivatives, especially acrylonitrile.

Prices are softening. Refinery-grade propylene is around 11.5 to 12 cents per pound, and March contracts settled at 20.5 cents per pound for chemical-grade material and 22 cents for polymer grade. Contracts for April and May are still being negotiated. One producer says its customers have accepted a contract reduction of 1.5 cents per pound for April and another penny for May. A second producer says April "is done at a reduction of 1.5 cents," but May is still under negotiation.

"We're hoping for a reduction of just 1 cent for May, but some of our customers are pushing for a 2 cent reduction. Given the shape the market is in, they may prevail."

Yet other producers say pricing may be near an inflection point. "Speculators have recently made some purchases of refinery-grade propylene," a producer says. "They're buying because they expect pricing to get stronger."

Low inventories of propylene derivatives and their finished products could boost demand and pricing. "Propylene is in a destocking mode because inventories got built up last year, and the run-up in gas costs encourages buyers to wait for lower prices," a producer says. "When the economy comes back, demand should pick up with it."

ACETONE--The price of acetone sold to the methyl methacrylate (MMA) industry remains under negotiation. A marketer says there is "a likelihood of downward pressure" for second quarter contracts because supplies are strong. For first quarter contracts, MMA-grade acetone price fell 1.75c., to 19c. per pound. Other grades of acetone are selling domestically in the low-to-mid-20c.-per-pound range.

BTX--The May contract price for benzene has settled at $1.17 per gallon after being nominated at $1.20. The spot market, as of early last week, was around $1.19, with forward pricing, according to ICIS-LOR, of $1.20 to $1.22 for June material and $1.23 for July.

The tight gasoline market continues to raise the prices of toluene and xylenes. As of early last week, toluene was $1.31 to $1.34 per gallon for spot material, and xylenes were $1.29 to $1.32.

DOW--The Dow Chemical Company is raising the zone premium charges for several of its businesses in the US and Canada. That action increases the list price premiums for certain products shipped west of the Rocky Mountains, effective July 1.

"After several months of analysis, we have determined that an adjustment to the zone premiums is needed in these businesses," says Tom King, Dow's global director of sales and marketing for performance chemicals. "The current zone premiums have not been changed in the last several years, yet our costs to serve customers west of the Rocky Mountains have increased significantly."

Zone premiums in North America for glycol ethers, polyglycols, vinyl acetate, acrylic esters, isopropanol, ketones, ethanols, acetic esters, oxo products, acetone, glycerine and low-temperature thermal fluids in Zone 2 or Zone B are 1c. per pound for material in current trucks, 5c. per pound for material in new trucks, and 2c. per pound for material in new railcars. In Zone 3 or Zone C, those premiums are 4c. per pound for current trucks, 8c. per pound for new trucks, and 3c. per pound for new railcars.

Zone 2 or Zone B encompasses California, Arizona and the maritime provinces of Canada. Zone 3 or Zone C encompasses Colorado, Idaho, Montana, North Dakota, New Mexico, Nevada, Oregon, South Dakota, Utah, Washington, Wyoming, British Columbia, Alberta and Saskatchewan. Zone 1 or Zone A encompasses all states not in Zone B (2) or Zone C (3), as well as Ontario, Quebec and Manitoba.

NONENE--The run-up in gasoline prices during the last two months is pressuring nonene prices, and The Plaza Group, a major marketer, is seeking a 4c.-per-pound increase for off-list prices, effective June 1. The list price is 60c. per pound, but market prices are in the low-to-mid-30c.-per-pound range in the US, and the low-to-mid-$500-per-metric-ton range in Europe and Asia.

PHENOL--High feedstock costs are crimping margins, and producers are running close to the cost curve. Despite "clearly significant capacity," pricing is expected to remain in the low-to-mid-30c.-per-pound range because energy and feedstock costs are keeping a strong floor on phenol pricing.

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