PU brightens up

15 March 2004 00:01  [Source: ACN]

PU markets in Asia are experiencing a wide spectrum of fortunes, with some markets saturated and others seeing explosive demand growth. The growth engine lies in China, where major drivers are the automobile and construction industries. And producers are looking forward to a brighter 2004 despite rising raw-material costs. Report by Malini Hariharan

AFTER a difficult 2003, when the polyurethane (PU) industry had to cope with high energy and feedstock costs that dented margins and with a fall in demand in the first half of the year due to Sars (severe acute respiratory syndrome), producers are pinning their hopes on a substantially better 2004.

Given the slow growth in North American and European markets, Asia continues to be the focal point for the industry. However, some players caution that even the Asian market represents a mixed bag of fortunes.

First, a quick look at what made things difficult in 2003. The most important issue was high raw-material costs that started right in the first quarter of last year. And then there was Sars, which resulted in a slowdown in China’s production of furniture, a major market for toluene di-isocyanate (TDI). However, it must be mentioned that demand did recover towards the end of the year.

Sars was followed by the introduction of antidumping duties by China on TDI exports from Japan, South Korea and the US.

Definitive antidumping duties, which are applicable for five years, were introduced in November. The duties ranged from 7-28% for US companies and 4-49% for Japanese companies to 3-5% for South Korean companies. However, with the exception of BASF, duties on exports by all other companies were lower than the preliminary duty of 20-30%.

And luckily for Japanese and South Korean methylene di-p-phenylene isocyanate (MDI) producers, China dropped an investigation into alleged dumping last year after Yantai Wanhua Polyurethanes withdrew its complaint.

For Japanese producers, an additional burden was the rising yen, which moved up from 120 to the US dollar to 105 to US$1 in the fourth quarter.

‘This caused big damage,’ says Shigeki Mori, board director, corporate planning division, at Mitsui Takeda Chemicals, the Japanese producer with a TDI capacity of 240 000 tonne/year and MDI capacity of 60 000 tonne/year.

‘Most of our sales are in the export market. TDI prices were quite stable last year at US$1600-1700/tonne cfr Asia. But there was a 10% appreciation of the yen. This and high raw-material costs affected profitability. In the past, a rising yen had resulted in a decline in raw-material costs. But that was not the case last year. So the effect was quite severe,’ he adds.

And though the Japanese economy did quite well in 2003, the benefits to the PU sector were not substantial. ‘One of our big customers is the auto industry, which is practising severe cost control,’ points out Mori. This made it difficult for producers to implement price hikes.

Mitsui Takeda predicts that the industry will continue to face high raw-material costs in 2004, a view shared by all other producers. It also expects the yen to remain strong, which means there is even more pressure to achieve higher prices in the Japanese and international markets.

The planning manager for Asia at Huntsman Polyurethanes, Andrew Kirkwood, points out that MDI feedstock costs are at historically high levels with no relief in sight in the short term.

‘Market prices are driven by many factors and not just feedstock costs,’ he adds. ‘Over the past 12 months or so, the market price of MDI has edged up to provide some margin recovery. But it has not kept pace with feedstock-cost increases. There is some way to go before earnings will be sufficient to support the necessary growth for the whole PU industry.’

Efforts are still being made to push up numbers. Earlier this month, Dow Chemical announced that it would raise its prices for TDI, MDI and polyols in the US, Europe, the Middle East, Africa and Indian subcontinent. It aims to raise the prices of TDI and flexible polyols by Euro100 (US$124)/tonne in Europe from 1 April. The planned upward revision in MDI and rigid polyols in Europe is Euro150/tonne.

Commenting on the need for the price hike, Dow said: ‘Throughout 2003 and the start of 2004, we have seen continued pressure on our profitability from high raw-material costs and volatile energy prices, making price increases essential to margin recovery.’

In Northeast Asia, TDI producers were attempting in early March to raise prices to US$1800-1880/tonne cfr China, although buyers were resisting, asking for product at around US$1750/tonne cfr China. Still, prices have moved up by around US$30/tonne since the start of this year.

MDI producers have been more successful with polymeric MDI prices rising by US$150/tonne since January to US$1600-1650/tonne cfr China while pure MDI has moved up by US$200/tonne to US$2000/tonne cfr China. ‘One factor is the snug supply, while the other is the upward movement in benzene and aniline costs. But even these isocyanate prices do not fully cover the increase in raw-material prices which are at their highest level in five years,’ says a trader.

Looking forward, one factor that will work in favour of producers is the expected strong growth in demand, especially in China, Asia’s largest consuming centre.

‘In the recent past,’ says Kirkwood, ‘Asia has been the growth market in the PU industry. We expect that, with the movement of global production into the region, particularly in north Asia, demand will remain strong over the next few years. Global demand and supply balance for MDI will continue to tighten until new assets come onstream in 2006.’

The tightening of the market is likely to result in some relief from the high input costs with a modest recovery in margin for producers. And though TDI supply will not be as snug, the expectation is that prices will follow the same trend as MDI, says the trader.

IAL Consultants points out that the Asian PU market continues to be strong despite high energy and feedstock costs. While MDI producers have managed some price increases, the outlook for TDI is also improving. Overall, the consultancy expects the northeast Asian isocyanate market to tighten over the next two years because of the lack of new capacity.

IAL, which will be releasing a report soon on the Asia-Pacific PU market, estimates that total PU production in the Asia-Pacific was 3.710m tonne in 2003; this will rise by 5%/year to 4.748m tonne in 2008. In 2002, the Asia-Pacific saw a 6-7% growth in PU production compared with 0.2% in the US and 3.2% in Western Europe. While the Asia-Pacific accounted for about 27% of global PU production in 1995, its share had risen to 35% in 2003.

The consultancy expects Asia-Pacific MDI demand to grow by at least 4-5%/year during 2003-08 while TDI demand in the region is likely to grow faster, at 6%/year, reflecting the huge production of flexible slabstock in the region.

It estimates that TDI consumption in northeast Asia was 386 270 tonne in 2003; this is expected to rise to 515 040 tonne in 2008.

The main applications for TDI are in the production of moulded and flexible foams, elastomers, coatings and adhesives, with foam products accounting for some 80% of demand. Planned production expansions are being driven by the large demand for flexible foam from the Chinese furniture industry as well as the automotive seating industries across Asia.

According to Mori of Mitsui Takeda, a conservative demand growth forecast for TDI in Asia is 8%/year up to 2008 while an optimistic forecast is 10%/year. The company expects MDI growth to be higher at around 10%/year.

Etienne de Walque of de Walque & Associates estimates that MDI consumption in Asia excluding Japan will see a growth of slightly over 10% in 2004 and 2005. It should then grow at 8-9%/year until 2010.

China will remain the engine of growth in the Asia-Pacific. And as the country accounts for nearly 52% of Asian PU production, any slight increase or decrease in demand will affect the entire Asia-Pacific market.

IAL sees Chinese PU production growing by 7.8%/year to reach 2.797m tonne in 2008 from 1.917m tonne in 2003. Japan, the second-largest production centre in Asia, is likely to see output rise from 621 240 tonne in 2003 to 637 370 tonne in 2008. And the forecast for South Korea is for production to increase from 434 460 tonne in 2003 to 483 150 tonne in 2008. However, production in Taiwan is expected to drop from 214 760 tonne in 2003 to 196 980 tonne in 2008.

BASF says: ‘Over the next 12 years, the market for PU in China is expected to grow at about 10%/year as long as the economy continues to grow at about 7-8%/year. We believe China will become the largest PU market in the world by 2015.’

Among the major drivers are the automobile and construction industries. Consumption of all construction materials is expected to increase in China until the 2008 Beijing Olympics.

IAL points out that, in automobiles, China had the fastest growth in production and sales of over 35% in northeast Asia in 2002. The industries in Japan and South Korea also saw a rising trend, but this was more towards meeting export demand while China’s growth was driven by a rapidly expanding domestic market.

The other promising sector in China and many other countries in Asia is appliances such as refrigerators. IAL says that demand for refrigerated goods continues to grow in northeast Asia whether it is for the storage of fruit and vegetables or for prepared meals.

Although the domestic-appliance sector is saturated in a large part of Asia, there is potential for growth in countries with a large rural population. Market penetration in rural communities across Asia is reported to be only 20% compared with 80% in the urban centres. But IAL cautions that the potential to develop rural markets is limited by the lack of sales and distribution networks for both appliances and frozen foodstuffs. And purchasing habits in rural communities may also limit the demand for refrigerated and frozen foods, with people preferring to prepare fresh meals.

For MDI, the fastest-growing segments in China are spandex fibre, rigid foam, leather and shoe sole, says a Nippon Polyurethane source. The total demand for this product is estimated to be 400 000 tonne. The market this year could be constrained by tight supplies, with demand likely to grow at 20%, lower than last year’s 30%. Yantai Wanhua Polyurethanes is the only producer of MDI in China, with a capacity of 80 000 tonne/year.

In TDI, China has four producers with a total capacity of 110 000 tonne/year (see table below). In comparison, Japan has a total MDI capacity of 320 000 tonne/year and TDI capacity of 279 000 tonne/year, while South Korea’s total MDI capacity is 148 000 tonne/year and its TDI capacity is 261 000 tonne/year.

But China will become a significant producer of TDI and MDI after 2006 once new capacities come onstream.

BASF, Huntsman and their Chinese partners – Shanghai Hua Yi (Group) Company, Sinopec Shanghai Gao Qiao Petrochemical Corp and Shanghai Chlor-Alkali Chemical Co Ltd – are expected to start operations at new MDI and TDI units at the Shanghai Chemical Industry Park in 2006. The companies received permission from the Chinese authorities last year to raise the capacity of their MDI project to 240 000 tonne/year from 160 000 tonne/year, while the TDI project capacity was revised to 160 000 tonne/year from 130 000 tonne/year. Groundbreaking for the US$1bn isocyanates complex is due to take place at the end of this month.

Another foreign major, Bayer MaterialScience, also has projects lined up in China. A 160 000 tonne/year TDI plant is due onstream in Caojing in 2009. The company’s MDI project of 230 000 tonne/year, also at Caojing, will come up in two stages. Polymeric and monomeric MDI production from crude MDI is scheduled to start by 2006, while the facility to produce crude MDI is expected to be ready in 2008.

Bayer will source crude MDI from the BASF/Huntsman project until its own unit starts up. The BASF/Huntsman project will also supply Bayer with TDI until the latter’s plant is up and running.

Bayer also said last year that it is building an 11 000 tonne/year polyisocyanates plant at its Caojing complex. Production is scheduled to start in late 2004. The company is also looking at a 30 000 tone/year hexamethylene diisocyanate (HDI) plant at the site by 2006, which may be expanded later by 20 000 tonne/year. HDI is a raw material for aliphatic polyisocyanates.

In April 2003, the company commissioned an 11 500 tonne/year aliphatic polyisocyanates plant at Caojing.

And Bayer is also aiming to be the first local producer of low-monomer TDI adducts to support the Chinese government’s push to reduce free-TDI content in wood and furniture coating systems for interior applications.

Bayer had made significant changes to its global PU feedstock portfolio during the past year. In October 2003, it announced that TDI production at a 14 000 tonne/year joint-venture plant in Niihama, Japan, would be stopped in March 2004. The plant is a 60:40 joint venture with Sumitomo Chemical called Sumika Bayer Urethane. The joint venture also operates an MDI facility at Niihama that the two partners are not planning to close.

Explaining the TDI plant shutdown, Bayer said that keeping it open could ‘no longer be justified on economic grounds’.

Earlier in the year, Bayer had announced plans to close a 36 000 tonne/year TDI plant at Leverkusen, Germany, a Bayer-Shell Isocyanates joint-venture 36 000 tonne/year MDI plant in Antwerp, Belgium, and a Bayer-Cysda joint-venture 20 000 tonne/year TDI unit in Mexico.

By 2006, the company expects its global MDI capacity to reach 920 000 tonne/year from the current 800 000 tonne/year. Besides the Caojing project, a 230 000 tonne/year plant in Texas, US, would be expanded to 300 000 tonne/year and the capacity of a 100 000 tonne/year unit Tarragona, Spain, would be raised to 150 000 tonne/year. The company currently has seven plants worldwide.

Moving back to China, local companies have also made known their investment plans. One of them is China National Blue Star Corp.

Blue Star Cleaning, a subsidiary company, is due to expand its 25 000 tonne/year TDI plant in Taiyuan, Shanxi, to 30 000 tonne/year in Q1 2004.

Yantai Wanhua Polyurethanes has lined up a 160 000 tonne/year MDI project in Ningbo, Zhejiang, which will be integrated with an 80 000-100 000 tonne/year formaldehyde unit and a chlor-alkali plant. The company is also considering building an aniline plant, as its current capacity would be insufficient to meet the requirements of the MDI project. Yantai has yet to reveal the capacity of the chlor-alkali project that will come up in two phases.

Although the company is scheduled to bring the MDI, formaldehyde and the first phase of chlor-alkali onstream in H1 2006, work is being done quickly so startup could be earlier than the targeted date.

Another company with projects in the pipeline is the Jin Hua Group which had invited Chematur Engineering last year to explore technology opportunities for a 50 000 tonne/ year TDI project in Huludao, Liaoning. The company has targeted startup for end-2006.

Late last year, the Jin Hua Group started negotiations with China North Industries Group Corp (CNGC) for the latter to take a majority stake in the project.

CNGC, a Chinese state-owned enterprise that specialises in supplying products to the Chinese military, civilian machinery companies and the chemical industry, would supply dinitrotoluene, a feedstock for TDI, to the project.

Gansu Yinguang Chemical is to add two lines to its 20 000 tonne/year TDI plant in Baiyin, Gansu, which will boost its total capacity to 94 000 tonne/year. The first line is due to be completed this year, while work on the second line of 50 000 tonne/year will start next year and be completed in 2005. Both lines will use local technology and obtain feedstock from domestic producers.

Among the projects that were completed last year in China, Cangzhou Dahua Group Co expanded its 20 000 tonne/year TDI plant at Cangzhou, Hebei, by 10 000 tonne/year. The company has also expressed interest in building a new 50 000 tonne/year TDI unit at the same location for startup in 2005.

One company that is very interested in having a production base in the country but has yet to launch a project is Mitsui Takeda. The company has been in and out of talks with Chinese companies for more than a year.

The country is important as it accounts for 20% of Mitsui Takeda’s business volume. ’We will go to China in ten years to produce TDI, MDI and propylene glycol,’ says Mori.

Mitsui Takeda, which commissioned a new 60 000 tonne/year TDI plant last year, says that its current TDI capacity will be enough until 2005. A new plant will be needed thereafter. Until then, the company will look at expanding its system houses in China, Malaysia, Indonesia and Thailand.

As for other projects in Asia, Kumho Mitsui Chemicals is considering debottlenecking its 50 000 tonne/year MDI plant in Yeochun, South Korea, next year by 10 000 tonne/year. But the company appears to have dropped plans to build a new plant at the same site.

BASF is due to complete a 60 000 tonne/year expansion of its 100 000 tonne/year MDI plant soon in Yeochun. The company started a new 140 000 tonne/year TDI plant at the same site late last year.

With the South Korean market facing oversupply, producers are relying on the China market to absorb their output.

In Taiwan, Nan Ya Plastics is also considering adding to TDI. A 90 000 tonne/year plant is under consideration which would boost the company’s total capacity to 120 000 tonne/year. Until this materialises, Taiwan will remain a net importer. IAL estimates that the country imported 15 000-20 000 tonne in 2003, mainly from Japan and the US.

In the Middle East, work on a new isocyanates complex in Bandar Imam, Iran, is 39% complete. The project, which consists of a 30 000 tonne/year aniline unit, a 40 000 tonne/year MDI plant, a 40 000 tonne/year TDI unit and a 56 000 tonne/year nitric acid plant, will be operated by Karoon Petrochemical, a joint venture between National Petrochemical Co, Hansa Chemie of Germany and Chematur Engineering of Sweden, which is providing the technology. NPC holds a 40% stake in the venture, with the other two partners holding 30% each.

The startup of the first phase, which comprises the TDI unit, is scheduled for April 2005.

There are no doubts that TDI and MDI projects that have been planned for the next few years will be needed to meet growing PU production in Asia.

While the region offers a lot of promise, IAL also sounds a note of caution. It points out that PU markets in Asia are experiencing a wide range of conditions ranging from overcapacity in the automotive and refrigeration industries to continual downward pressure on prices of finished goods and, until recently, even raw materials. Certain markets are saturated while others are seeing explosive demand growth. There is expansion in the number of processors and also consolidation even as manufacturers from other parts of the world continue shifting operations to China.

And as IAL puts it: ‘While China has become the growth engine of Asia, the main concern is how to keep this speeding train on the tracks of sustainable growth.’

IAL Consultants is completing a report on production of PU products in the Asia-Pacific that will illustrate the diversity of market conditions across the region. For more information, contact IAL at 44 208 832 7780 or visit www.ialconsultants.com

Global polyurethane market in 2002 (‘000 tonne)

Rigid Foam - Construction 1300
Rigid Foam - Appliances 700
Rigid Foam - In situ (non-appliance) 150
Flexible Foam - Slabstock 2100
Flexible Foam - Moulded 970
Elastomers 1490
Coatings 1400
Adhesives 530
Sealants 250
Encapsulants 50
Binders 365
Total 9305
Source: de Walque & Associates

Asian Market for PU Products (tonne)

2003 2008
Flexible Foam 1 126 820 1 514 800
Rigid Foam 591 750 717 350
Adhesives & Sealants 419 650 518 880
Coatings 777 100 973 720
Elastomers 795 540 1 013 820
Total 3 710 890 4 748 570
Source: IAL Consultants

Asia-Pacific TDI Capacity in 2003*

Producer Location Capacity (Tonnes) 2003
Gansu Yingguang Baiyin, China 20 000
Wusong Chemical Complex Shanghai, China 40 000
Cangzhou Da Hua Group Ltd Cangzhou, China 30 000
Taiyuan Chemical/Blue Star Cangzhou, China 30 000
Total – China 110 000
Sumika Bayer Japan Niihama, Japan 14 000 **
Nippon Polyurethane Industries Tokuyama, Japan 25 000
Mitsui Takeda Chemicals Omuta, Japan 120 000
Kashima, Japan 120 000
Total – Japan 279 000
China Petrochemical Taiwan 20 000
Nan Ya Plastics Mailiao,Taiwan 60 000
Total – Taiwan 80 000
D C Chemical Kunsan, South Korea 45 000
Korea Fine Chemicals Yeochun, South Korea 76 000
BASF Urethane Korea Yeochun, South Korea 140 000
Total – South Korea 261 000
Narmada Chematur Bharach, India 15 000
Total Asia-Pacific 635 000
* TDI - toluene di-isocyanate ** will be shut down in March 2004
Source: IAL Consultants/ACN DATABASE

Asia-Pacific MDI Capacity in 2003*

Producer Location Capacity (tonne/year)
Yantai Wanhua Polyurethanes Yantai, China 80 000
Total – China 80 000
Mitsui Takeda Chemicals Omuta, Japan 60 000
Nippon Polyurethane Industry Tokuyama, Japan 170 000
Sumitomo Bayer Urethane Niihama, Japan 90 000
Total – Japan 320 000
BASF Urethane Korea Seoul, South Korea 100 000
Kumho Mitsui Chemical Yeochun, South Korea 48 000
Total – South Korea 148 000
Total Asia-Pacific 548 000
* MDI - methyl di-p-phenylene-diisocyanate
Source: IAL Consultants

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