Polystyrene Market Staggered By Severe Margin Pressure

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

The polystyrene market is facing weakening demand, downward pricing pressure and rising feedstock costs, which are all contributing to margin pressures. Industry-wide operating rates in the US are below 80 percent at some plants, and European makers are also cutting back on production. Despite the difficult going in the first half of this year, some producers point to improving conditions for the third and fourth quarters.Demand for polystyrene has been off significantly since the beginning of the year. "The year so far has been real soft from a demand standpoint; volume is off considerably," says Jeff Denton, senior product manager of polystyrene, North America for Dow Plastics. "Demand has been pretty weak so far," says Ron Hornack, vice-president of styrenics sales for Nova Chemicals.So far this year, buyers of polystyrene have been content to use their inventories and stay out of the market. This has driven prices down and emboldened buyers to remain on the sidelines. "The overall inventory adjustment was largely driven by the economic downturn or the fear of an economic downturn," notes Mr. Denton. "Convertors are watching their inventories more closely than ever," says Scott Davis, vice-president of styrenics for Atofina Petrochemicals.In response to the sagging demand, producers have throttled back their production, resulting in industry-wide operating rates below 80 percent. Dow brought on the line just last summer "Not including EPS [expanded polystyrene], first quarter operating rates were roughly 75 percent," notes Alex Lidback, director of benzene and styrenics for Houston-based Chemical Market Associates Inc.Producers' demand woes were compounded by the run-up in the cost of raw materials, namely ethylene and benzene, the main components that make up styrene. The spike in natural gas costs exacerbated the situation, driving up the cost of ethylene as well as energy costs in general. "High natural gas prices really ran everything up earlier this year," says Mr. Davis. "Styrene monomer is a big energy user, so when natural gas prices went up, that really affected us earlier in the year."On the feedstock side, polystyrene producers came out of a weak fourth quarter of last year into one of the worst months ever. "January was not a good month for polystyrene makers," says Mr. Denton. "We had the highest possible costs, and no ability to get any price through to the marketplace." Natural gas costs have come down from their $10 highs in January but are still well above what North American producers are used to paying.Despite the run-up in feedstock costs, polystyrene producers were unsuccessful in their one attempt at a price increase. Pro-ducers were calling for a 3 cent increase, effective April 1. However, buyers balked at the increase.Polystyrene's demand problems are not limited to North America. In Europe, three producers have idled a significant amount of capacity in the face of limp demand.Most recently, Dow Chemical has idled its 130,000 metric ton PS unit in Schkopau, Germany, The company says it has higher value uses for the raw materials used to feed the unit. The cut represents roughly 20 percent of the European PS capacity.Previously, BASF AG cut its European output by roughly 20 percent. The company is reducing production for several weeks to carry out optimizations at its facility. BASF has three polystyrene plants in Europe--a 360,000-metric-ton-per-year facility at Lud-wigshafen, Germany, a 230,000-ton- plant in Antwerp, Belgium, and a 50,000-ton-plant at Tarragona, Spain.Prior to that, Atofina announced it was cutting production at its plants in Gonfreville, France, El Prat, Spain, and Stalybridge, England, by 30 percent because of poor margins caused by higher production costs and low selling prices. The company says it will resume production as prices improve.Enichem has also been rumored to have cut production at its European plants by about 25 percent for May and June.North American producers have also been using the downturn in the polystyrene industry to take care of maintenance and turnarounds. "We are certainly trying to take advantage of weak demand to make sure we are doing maintenance at the most opportune times," says Dow's Mr. Denton. "Our operating rates based on how we have managed the plants in the first quarter and into the second quarter have definitely been below what we typically run."On a more permanent basis, Nova shuttered its 105,000 metric ton plant in Joliet, Ill., on February 5. Nova will dismantle the unit and remediate the site throughout the rest of the year. Nova closed the plant because of poor margins and the high cost of investment that it would have required.Despite the closure, capacity continues to be added. Next up will be Atofina, which is building a 500-million-pound-per-year plant at its Carville, La., site. Construction is proceeding on schedule, and the plant will be operational in 2002, according to Mr. Davis.Atofina says the new line will increase the facility's capacity to 1.625 billion pounds per year. The Carville site is also home to a 2.2-billion-pound styrene monomer plant that is a joint venture with GE Plastics and is operated by Atofina. The company says the investment is in keeping with its policy of developing competitive industrial bases throughout the world.Atofina is also increasing its Carling, France, polystyrene production facility by 60,000 metric tons, bringing its overall European capacity to 1.25 billion pounds. Atofina announced last week that it was delaying the start-up of the expansion to the fourth quarter due to continuing low demand across Europe. In addition, the company operates a 150 million pound plant in Asia.Despite the current slowdown in polystyrene, producers remain cautiously optimistic, according to Mr. Davis. "The next few months will confirm what kind of year it is going to be," says Atofina's Mr. Davis. "I really believe volume is going to be reasonably strong the rest of the year," says Mr. Denton. "However, when all is said and done, the market will have lost some ground at the end of the year."

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