26 July 2004 00:01 [Source: ICB Americas]
Benzene and styrene prices continue to rise unchecked as the global benzene shortage sends spot benzene prices weekly to new highs. The downstream impact of record benzene prices has been significant with styrene and polystyrene producers throttling back production and seeking huge price increases for their products.
In April, spot benzene prices peaked at $3.10 per gallon, more than 50 cents higher than the previous record. Prices then retreated in May and early June, before beginning their current ascent, which has pushed spot prices as high as $4.25 per gallon for July and $4.20 for August. The July contract price settled at $3.07 per gallon, up 47 cents versus June.
“We all thought it was on its way down [following April] and now look at it,” says a benzene producer.
The primary cause of the current run-up has been a global shortage of benzene combined with a rash of outages in Europe. “People are short, and they remain short,” says Alex Lidback, director, aromatics market report, for Chemical Market Associates Inc. “The big issue is we are shipping benzene to Europe, and we are also shipping a lot of styrene to Europe. So, the combination of the two adds almost 40,000 to 50,000 tons of benzene to exports,” he notes. “Operational issues in Europe have been the driver.”
In spite of US exports to Europe, the US remains incapable of meeting its own benzene needs. “There is not enough benzene in the world. In particular, there is not enough benzene on the US Gulf Coast. The US is net short of benzene,” says a producer.
While the run-up in benzene costs has come up pretty quickly, any turnaround in pricing dynamics may take longer to have an impact. “We don’t see this thing getting resolved any time soon,” says Mr. Lidback. “You pick the price for benzene, but it will be very expensive. There is a fundamental shortage on a global basis for benzene. The market keeps getting tighter as it grows globally,” he adds.
“It is going to take benzene demand to fall off and inventories will have to build before prices retreat,” says a styrene producer. “We are adjusting to a condition where benzene will be relatively tight for an extended period—12 to 18 months,” says Chris Pappas, senior vice president and president of styrenics for Nova Chemicals Corp. “The world of benzene will be snug, and I think we have to learn to deal with it. We also have to learn to deal with it downstream and understand that the value and use of our polymers is strong, and we can deal with high feedstock costs. We just have to get our polymer prices up and get our finished goods prices up,” notes Mr. Pappas.
“People are still in disbelief,” notes Mr. Lidback “So, they are buying the bare minimum today and what happens is you are always kind of short because you are buying the minimum today and then you realize your demand is still pretty healthy and then you are forced to cover in the spot market,” he adds.
“One thing I know is I don’t want to be the guy at $4.05 benzene when this thing begins to tumble,” says a styrene producer.
To cope with the run-up in benzene pricing, styrene producers have severely cut back their operating rates. Industry-wide operating rates are about 80 percent, according to Chuck Venezia, vice president of benzene and derivatives for Houston-based DeWitt and Company Inc. “Styrene is running a little lower in July than June, but frankly speaking, it is about as low as it can go, unless you start seeing huge demand destruction downstream,” says Mr. Lidback.
Nova’s Mr. Pappas acknowledges that his company has cut operating rates. “We are not running our Bayport [Tex.] facility at anything like full rates,” he says. In addition, Nova and other US styrene companies are looking to minimize inventory, not produce polymer when feedstocks are spiking and trying to get price increases through before they make polymer, according to Mr. Pappas.
To raise prices, styrene producers have announced 5 to 7 cent increases for July. Most producers anticipated securing at least 5 cents per pound for July. August announcements were sent out at 9 and 10 cents per pound.
Downstream, the increases have been even more drastic. In addition to a 4 cent-per-pound increase set for August 1, Nova is looking to boost solid polystyrene pricing by 12 cents per pound and expandable polystyrene 10 cents per pound, effective August 16. Furthermore, the company requested customers pre-place orders for August and September so that it can “appropriately plan, purchase and secure benzene and other raw materials in this environment to give them adequate supply moving forward,” according to Mr. Pappas. He also notes that senior management will be involved in price management during this time because Nova views this “as an extremely critical issue in restoring the styrenics business to some level of margin capability during these unprecedented feedstock moves.”
Nova is not the only polystyrene producer seeking significant increasesfor August. Almost all other US producers are seeking a similar hike. How customers will react remains to be seen. “This price increase is required, necessary and justified, and our customers are wrestling with the implementation of it, including looking at raising the price of their goods downstream,” says Mr. Pappas. “Ultimately, I think we have to recognize the value and use of these materials downstream is still very good and that consumers, in our opinion, will pay for commodity plastics in disposable packaging, food packaging and construction applications because the value is there.”
One threat to polystyrene producers is demand destruction as downstream producers substitute other, cheaper products for polystyrene. “Polystyrene is really getting hurt. PET [polyethylene terephthalate] and polypropylene are taking positions away from polystyrene,” notes a polystyrene producer.
“Until August, alternative polymeric materials had all moved in similar pricing amounts, so polystyrene has not lost relative competitive position through the July time frame,” says Mr. Pappas. “The August moves would be substantial to polystyrene and we will have to wait and see what happens to other polymers.”
“There are some market substitution opportunities for polypropylene, but polypropylene has been under the same kind of cost push through July,” says Mr. Pappas. “They are taking a bit of a breather at this stage, but we see nothing in the future that would lead us to believe that polypropylene would be anything but very tight.”
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