Global Trade Patterns Shift in Butadiene Supply

26 April 2004 00:01  [Source: ICB Americas]

The role of the US in the global butadiene industry is set to change dramatically as northeast Asia assumes a greater role, and ultimately assumes the position as the price-setting region. As Asian influence grows, trade patterns will change as well, with Asia and Eastern Europe becoming the major importers of butadiene.

Last year, North American butadiene extraction capacity utilization wasust 81 percent, according to Phil Eiser-loh, vice president of C4 and derivatives for DeWitt and Company Inc. “The problem was that the demand was just not there and as a result, butadiene imports into the US and Mexico plus CC4 [crude C4] imports into the US were all lower last year than the year before,” he says. For this year, Mr. Eiserloh anticipates roughly 78 percent utilization.

In Europe, utilization rates reached 89 percent thanks to healthy demand from Asia. Mr. Eiserloh forecasts a 2004 utilization rate of about 85 percent due to the loss of US and Mexican export demand, which has fallen off following the start-up of Sabina Petrochemicals’ new extraction unit in Port Arthur, Tex.

Asian utilization rates topped out at 90 percent last year. DeWitt forecasts an increase in rates to 93 percent for 2004 and 2005 before falling off on account of significant new capacity additions. “If these facilities come on line as planned, the capacity utilization actually drops in the outlying years,” says Mr. Eiserloh. Utilization rates are also set to slip from Middle Eastern imports, specifically Iran and Saudi Arabia, which are both set to bring on substantial new capacity.

With the Middle East and Asia laying claim to the majority of new capacity expansions, global trade patterns are set to change significantly. First, as European demand continues to grow, European capacity should stay the same. “The source of supply over time is the reduced demand for European deep-sea product into Asia,” notes Mr. Eiserloh. “First European exports fall as the Western Hemisphere becomes self-sustaining and supply shifts to Asia. Later, additional Middle East supplies replace European exports, which at this point is required to supply European derivative growth.”

Traditionally, butadiene prices in the US have been a few cents higher than Europe to encourage exports. However, as the US grows self-sufficient, the trade flow from Europe to North America should slow to a trickle. “With the end of this trade flow, pricing will seek another price setter,” says Mr. Eiserloh. “Since Asia will be a net importer from Europe, at least in the initial years, the European price plus freight and fees will set Asian prices similar to the historical situation with the US. We believe the US price will settle in a range centered about 1 cent per pound above the European price, which should make US derivative producers more cost competitive than has historically been the case.”

Moving forward, an increase in legislation against methyl tertiary-butyl ether (MTBE) will have a significant impact on the butadiene and crude C4 markets in the coming years. MTBE has already been banned in California, New York and Connecticut and a national ban is not out of the question. As a result of the legislation, all of the on-purpose MTBE production in North America has been idled while refinery based production of MTBE is believed to be easing back.

Traditionally, the main source of crude C4, especially spot crude C4, has been Europe. The European alternative for crude C4 is to recycle it in their steam crackers, thereby backing out naphtha. So the European value for crude C4 is a factor on naphtha, with the factor typically being less than one. “That value plus freight and loading/unloading fees, set the delivered offer to sell crude C4 into the US,” says Mr. Eiserloh. In the US, he notes, the price that extraction unit operators would be willing to pay for crude C4 on a delivered basis was based on the butadiene value and the Raff-1 value where the value of the Raff-1 is calculated from its components.

“In the past, the Raff-1 value has been based on the value of its components with isobutylene going to MTBE, normal butylenes going to alkylation and butane or fuel value for the remaining components,” says MR. Eiserloh. Usually, the value of the Raff-1 is quoted as a percentage of unleaded regular gasoline because to calculate the price based on each separate component would be cumbersome.

With the quick exit from MTBE production, extraction operators are now scrambling to redefine their purchase economics. With MTBE no longer a viable alternative for isobutylene, it has been necessary to move isobutylene to its next alternative, which is alkylation. However, Mr. Eiserloh notes, this results in a value for the Raff-1 that is less than if the isobutylene had been valued to MTBE. “Simply put, Raff-1 has lost 20 percent of its value as a result of the quick disengagement of MTBE production, and that is a lotof value reduction,” he says.

In the past, both the butadiene and isobutylene represented upgrades over naphtha plus freight for European crude C4 exporters. Thus, 60 to 70 percent of the crude C4 stream was at an upgrade. “Now, with isobutylene moving to alkylation-based value, only thebutadiene portion of the stream repre-sents an upgrade,” says Mr. Eiserloh. The butadiene component of a crude C4 stream is typically 40 to 50 percent. “This means that to make the export profitable, butadiene must carry the freight burden alone rather than share it with isobutylene,” he adds.

In addition, trans-Atlantic freight costs have increased by at least 20 to 30 percent for spot shipments, which means that crude C4 shipments to the US have fallen off substantially since their peak in 2002.

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