Aromatics '04: BASF outlines ways to relieve price volatility

23 November 2004 14:28  [Source: ICIS news]

ANTWERP, Belgium (CNI)--The urgent need to tackle price volatility in aromatics, possibly through a futures market in benzene, was urged here Tuesday by Martin Widmann, senior vice president of procurement at German chemicals giant BASF.

 

Problems of difficulty with forecasting can be addressed through a better understanding of refinery economics and how they impact on the chemical industry, Widmann said in a keynote speech at the Third European Aromatics and Derivatives Conference*.

 

The blight of price volatility which has infected the aromatics markets, particularly this year, and which has been so painful, especially to buyers of benzene, can be targeted through managing risk with financial instruments, he argued.

 

This process will necessitate an increased transparency in the markets, said Widmann, and BASF supports such a move.

 

It is important that the whole industry takes on this challenge in order to promote healthy markets up and down the chain, he commented. Widmann added that if market players do not take up the gauntlet, they risk damaging the industry and seeing more and more substation and plant closures in aromatics derivatives markets.

 

The biggest problem Widmann identified was the lack of predictability in the aromatics markets, which he spotlighted by illustrating the inaccuracies in forecasting from both consultants and from within the industry.

 

“It is easy to complain about forecasts. It is easy to blame somebody else,” he said. “But internal forecasting has been just as inaccurate as those from consultants. Expectations in BASF in 2002 were that Auto Oil 2 [new environmental legislation] would make sufficient benzene available to meet the needs of the industry. We bought into this theory, as did so many others at this time, including benzene producers and consultants from outside the industry. This was a dramatic misjudgement by the whole industry.”

 

Clearly buyers of benzene have suffered for this error in judgement, he added. What everyone missed, according to Widmann, was that refineries had many other options for their aromatics, and they made their decisions based on the best economics for their own systems.

 

Also feeding into the expectation that there would be sufficient benzene in 2004 was the supposition that investment in aromatics would keep pace with new plant building for styrene, cumene, and phenol.

 

In fact, there is a huge discrepancy between the investment in downstream units and the new plant build for benzene. The fact that new crackers coming up in the last few years have not always included benzene (for instance crackers in the Middle East, which are ethane based) has exacerbated this problem.

 

“The whole value chain has to be healthy,” Widmann remarked. “Derivatives must be competitive and aromatics production must be competitive. There are borders which should not be crossed, in order to keep the whole chain healthy.”

 

If these tenets are not observed, downstream plants may have to cut back or even shut down. Substitution of polystyrene (PS) by polypropylene (PP) will never be total, but if the current situation continues, we will see more and more of this, according to Widmann.

 

An unexpected shortfall of benzene has meant that prices have been much higher than expected, and this is causing a margin squeeze for downstream markets.

 

Widmann was also concerned that a small volume of spot trade is playing a disproportionately large part in the overall price for benzene. This also adds volatility to the market.

 

“Very often we are wondering who is determining the price of benzene at the end of the day,” said Widmann. “I am not afraid of a more liquid spot market. This might even be part of the solution to the problem of volatility. We are talking about a commodity, so we should be able to deal with benzene as a commodity. BASF would support a paper market, a futures market. This could even lead to more transparency in the market. This is something that BASF is prepared to participate in.”

 

“From a buyer’s point of view, it is very important to solve these problems and not merely to shift the problem,” he commented. “The health of the whole market depends on having more stability in pricing. Only in a situation as painful as the one we have at present can we hope to get the interest of many players to try and solve these problems.”

 

The solutions that Widmann sees lie in removing some uncertainty from forecasting through a better understanding of upstream and downstream issues. He would also like to see some of the volatility taken out of the market using a few different options.

 

One possibility is backward integration, although BASF is clear that there is only so far that it is prepared to go with this option since BASF is not looking at refineries as part of its portfolio.

 

Widmann reiterated that BASF is interested in participating in a paper and futures market on benzene. The first step in this process is to add more transparency to the spot market by increasing liquidity.

 

BASF is currently active in Chemconnect in the US, where it is doing a large volume of business in a transparent online arena. In Europe, there has not been enough interest in using this platform to make it successful.

 

“Most likely, 50% of the people in this room would like it if it was,” said Widmann. Nevertheless, he encouraged the European industry to consider using tools to add transparency to the market with a view to ultimately enabling the industry to have a futures and paper market, which would give more control to industry players.

 

The problem with a paper or futures market is that no one seems ready to dip a toe in the water. “Nobody wants to take the risk in the current market situation. The circumstances (volatile pricing) make it very difficult to start. And we need as many people as possible to participate to make this approach successful.”

 

*Organised by global price reporting and market intelligence service ICIS-LOR, European Chemical News and consultants International eChem, the conference continues on Wednesday. ICIS-LOR and ECN are part of the same publishing group as CNI. 


By: Philippa Davies
+44 208 652 3214



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