CPDC taking control to try and curb soaring costs

18 October 2004 00:01  [Source: ACN]

CHINA Petrochemical Development Corp (CPDC) is using operating-rate discipline to control supply and therefore maintain margins in the face of soaring raw-material costs.

The Taiwanese caprolactam and acrylonitrile producer is running its caprolactam capacity at an operating rate of only 90% and its acrylonitrile assets at 85% because of the surge in benzene, propylene, and ammonia costs. But CPDC is running its 150 000 tonne/year of acetic acid capacity flat out as a result of the very tight market that it expects to last for at least the rest of this year.

It has managed a steady increase in caprolactam pricing over the past few months to reflect the rise in benzene costs. In April, it concluded business at US$1450/tonne cfr Taiwan, in May at US$1150/tonne cfr Taiwan, and in June at US$1550–1600/tonne cfr Taiwan. By September, its pricing had risen to US$2050–2100/tonne cfr Taiwan, with its offer for October at US$2250/tonne cfr Taiwan.

Benzene costs have risen steadily over the past six months from around US$600/tonne cfr Taiwan in April to the October price of US$1400/tonne cfr Taiwan.

‘So far, we have managed to maintain reasonable margins because of good downstream markets. However, we are concerned that, unless raw-material costs peak, our customers will not be able to accept many more price increases,’ said Edward Wang, vice-president of CPDC.

‘The problem is that the prices our customers obtain for their products are fixed for long periods and therefore cannot be increased as raw-material costs rise.’

He said September nylon chip prices were US$2040/tonne cfr Taiwan, giving a spread of US$490–440/tonne cfr Taiwan. Wang placed the minimum spread necessary for nylon chip producers to cover their costs at US$450/tonne cfr Taiwan.

He added that caprolactam demand growth was healthy, with an average of 100 000 tonne/year of new nylon chip capacity due onstream in China during each of the next five years. CPDC expects 250 000 tonne/year of chip capacity to be commissioned in China this year.

But Wang said CPDC had no intention of adding further caprolactam capacity because the return on capital on its current investment was way below its minimum of 15%. Its capacity in the nylon intermediate is 230 000 tonne/year, comprising an 80 000 tonne/year plant and a newer 150 000 tonne/year facility.

He expressed the hope that benzene would decline to US$900–1000/tonne cfr Taiwan, although he said the oil price and the benzene supply-and-demand balance would prevent prices from falling back to their levels in H1 this year before the price rally began. In late March, for instance, benzene was trading at US$565/tonne fob Korea.

‘The past eight months have been exceptional, but provided benzene does decline to US$900–1000/tonne cfr Taiwan, we can start to make some money,’ he said.

But CPDC has at least managed to complete the process, which began in Q3 2002, of persuading its customers to accept monthly settlements for caprolactam supplies rather than quarterly settlements. The last customer on quarterly settlements agreed to make the switch in August this year.

The producer had always lost out under the quarterly deals. During upcycles, buyers would often successfully push for early settlements, whereas when prices were declining they had sufficient market muscle to hang on until late in each quarter before accepting agreements.

Acrylonitrile pricing has also steadily climbed this year from US$870/tonne cfr Asia in January to CPDC’s September price of US$1350/tonne cfr Taiwan. But the price rally could be under threat from declining acrylic fibre spreads. In H1, acrylic fibre producers were enjoying spreads of more than US$700/tonne owing to reasonably healthy demand growth and a reduction in capacity.

Kanebo stopped production for good at its 31 000 tonne/year plant in Yamaguchi, Japan, at the end of last year. This followed the permanent closure by Asahi Kasei Chemicals of its 71 130 tonne/year of capacity in Mizushima, Japan, in March 2003.

However, the rise in acrylonitrile and the inability of acrylic fibre buyers to stomach further prices has since driven down spreads. CPDC said spreads were at US$450–500/tonne in September as against the minimum required to make a profit of US$500/tonne.

Acrylonitrile spreads, too, have come under pressure because of the surge in ammonia and propylene costs. This forced those dependent on externally sourced propylene to cut back operating rates, resulting in an average Asian operating rate of 85%, said Wang. He added that CPDC shut down one of its two 95 000 tonne/year acrylonitrile lines on 8 August because of high C3 costs.

But CPDC and other Asian acetic acid players are operating flat out in order to compensate for lost production by BP Petronas Acetyls and Celanese. The 500 000 tonne/year BP plant shut down in August for six days and for 15 days in September because of problems with carbon monoxide (CO) supply. The facility, located in Kerteh, Malaysia, was brought back onstream on 22 September. Force majeure is not due to be lifted until end-October.

Celanese restarted its 500 000 tonne/year plant in Pulau Ayer Merbau, Singapore, on 4 October after a shutdown, also caused by an interruption in CO supply that began in mid-September.

Such is the tight supply-and-demand balance that BP Chemicals and its joint venture partners have delayed the turnaround at their 200 000 tonne/year plant in Chongqing, Sichuan, China, from Q4 until the first quarter of next year. The shutdown is to enable work to be completed on increasing capacity to 350 000 tonne/year.

CPDC is due to take its 150 000 tonne/year plant off-line this month for 45 days. The extended shutdown is because CO supplier Chinese Petroleum Corp is carrying out maintenance and improvement work at its plant. If the work results in more stable CO supply, CPDC might raise the capacity of its plant to 160 000 tonne/year.

The tight supply has resulted in a steep rise in acetic acid prices. October spot deals were concluded at US$750–800/tonne cfr China, which compares with US$590-600/tonne cfr China in Q3, and Q4 contract nominations rose by US$100-200/tonne over Q2 settlements of US$500–550/tonne cfr China. CPDC’s Q2 contract price was US$480–500/tonne cfr Taiwan against its prediction that its third-quarter contract price would rise by US$120-130/tonne.

This very strong pricing is against improved methanol supply. The acetic acid feedstock was at US$240-250/tonne cfr China last week.

CPDC believes, however, that acetic acid is being propped up by only temporary supply factors. It anticipates that pricing will decline next year when supply increases.

However, other market players predict that supply will remain tight until 2006, with Asian demand growth placed at more than 10% per year. In 2003, Asian demand was placed at 3m tonne. The closure of further Chinese acetic acid capacity, which uses the high-cost ethylene-oxidation route, is expected to further benefit the remaining acetic acid players.

But no matter what the market conditions for caprolactam, acrylonitrile, and acetic acid, CPDC says it will stick to its new operating-rate discipline. ‘We are trying to communicate to customers that we will not sell at a loss, that we will not sell the extra few tonnes for the sake of earning a few dollars,’ said Wang.

But he conceded that the company had a long way to go achieve decent returns. CPDC returned a net profit of NT$101m (US$3m) in 2003 on a turnover of NT$18.9bn. Its forecast for this year is for a net profit of N$271m from a turnover of NT$22bn. ‘Our projected rise in net profit is not good enough, considering our expected increase in turnover,’ Wang said.

But at least the Taiwanese major appears to be moving in the right direction.

– John Richardson

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