Reviving fortunes

21 March 2005 00:01  [Source: ACN]

Rising feedstock costs have been putting pressure on the oxo-alcohol chain for more than a year. Nevertheless, producers are optimistic that margins will improve as demand growth in the all-important China market is robust. Malini Hariharan reports on the outlook for the industry

FOR many in the petrochemicals industry, the pain of high feedstock costs in 2004 was hard to escape and the oxo-alcohol chain was certainly no exception.

With Brent crude-oil prices setting a new high of US$53.36/bbl in early March and forecasted to remain on the higher side for the rest of 2005, oxo-alcohol producers once again face the challenge of regularly passing on input-cost hikes down the chain.

Take the case of propylene. In 2004, Asian spot propylene prices hit a peak of US$1030/tonne cfr Asia in September, up 78% since January. And so far this year, prices have risen by a little over US$200/tonne, to US$1020/tonne cfr Asia.

The outlook for the monomer looks bullish for the near term because of shutdowns at a few units in Q2 and the start of new derivative plants in South Korea and Taiwan. The only hope for buyers is resistance from the polypropylene (PP) market, where prices have stagnated.

The propylene situation in Europe is not very different, with the European Q1 contract price moving up by Euro65/tonne to Euro685/tonne. Nominations for Q2 had not been made at press time, but producers were said to be looking for a further hike given the tight demand-and-supply position.

In the US, the March contract price for refinery-grade propylene was settled 2.5 cents/lb lower at 39 cents/lb, but producers had nominated a 1 cent/lb increase for polymer and chemical grades.

Given this scenario, it is not surprising that feedstock costs are cited as the biggest challenge confronting oxo-alcohol producers in 2005.

‘The main issues for 2005 are volatility of raw-material prices and availability,’ says Heidi Barnes of Eastman Chemicals.

Earlier this month, Eastman announced that it would seek a US$44/tonne price increase for 2-ethylhexanol (2EH), normal butanol (NBA), and isobutanol (IBA) effective 1 April or as contracts allowed. Eastman said the increases were due to ‘increased market demand and operating costs, particularly in raw materials, energy, and freight’.

The latest price-hike proposal follows an US$88/tonne increase announced for March shipments.

Roger Schwarz, regional manager Asia at Oxeno, a 100% subsidiary of Degussa, says: ‘The oxo-alcohol business is burdened by strong oil and naphtha prices. There is pressure on margins. It is a difficult but not a desperate situation.’

Producers with upstream integration have been luckier, but they were not totally immune to the cost push.

‘The general phenomenon that we noticed last year was that the more upstream you are, the better it is,’ points out Schwarz.

The vice-president, oxo global business unit, at ExxonMobil Chemical, Robert C Davis, says the flexibility that comes from feedstock integration with worldscale refineries has enabled the company to outperform the competition.

‘Production plans are reviewed continually to identify the highest value for each process stream. Supply plans are optimised regionally and globally in response to changes in feedstock costs and market conditions. Nevertheless, the company’s plasticiser and oxo-alcohol businesses continue to experience feedstock-cost pressures. Margins above key plasticiser and related alcohol industry feedstocks such as propylene and phthalic anhydride remain compressed,’ he says

Substantial price increases have been achieved for oxo-alcohols and plasticisers. Priti Savla of Chemical Market Resources (CMR), a market research and strategic planning firm based in Houston, US, points out that, in the US, 2EH prices increased by 15-18 cents last year.

In Asia, NBA prices are at around US$935/tonne cfr NEA, up US50/tonne since February, while IBA has moved up by US$135/tonne in the last two months to US$870-880/tonne cfr East Asia.

Last year, spot prices of 2EH rose from around US$870/tonne cfr East Asia in January 2004 to a high of US$1060/tonne cfr East Asia in September-October. Prices dipped in December and January to US$900/tonne cfr East Asia, but have recovered since then.

Efforts are underway to raise prices for April material to over US$1020/tonne cfr East Asia despite a recent softening in the key Chinese dioctyl phthalate (DOP) market.

‘Customers are cautious as plasticiser margins are low. There is some resistance to higher prices, but they are slowly realising that today’s price makes sense, given the raw-material costs,’ points out Schwarz.

The softening of the DOP market in China is partly a result of some Chinese traders taking delivery of cargoes that had been booked at lower prices before the Lunar New Year holidays in early February. Another reason is a fall in orders for finished products with the end of the Christmas production season. But a revival in demand is expected in May or June.

Producers say spot supply of 2EH is tight, which means they are reluctant to bow to pressure for lower prices from buyers. ‘No supplier is desperate to conclude business below the price level that has already been achieved,’ says a second Asian producer.

In January, BASF Petronas Chemical said its oxo-alchol complex in Kuantan, Malaysia, would run at below 100% indefinitely owing to a shortage of propylene. The complex has the capacity to produce 160 000 tonne/year of butanols, 80 000 tonne/year of 2EH, and 100 000 tonne/year of DOP.

The tightness in supply is also being attributed to the upcoming maintenance shutdowns in Japan and South Korea, where producers are focusing on building up stocks.

In Japan, Kyowa Hakko has scheduled a turnaround of its 120 000 tonne/year 2EH plant in Yokkaichi from mid-March to April, while Mitsubishi Chemical plans to shut its 145 000 tonne/year plant from May to June. And in South Korea, Hanwha Chemical plans to shut its 90 000 tonne/year plant in April for three weeks.

These shutdowns are expected to neutralise the impact of extra volumes that will be entering the market once BASF starts its 250 000 tonne/year oxo-alcohol plant in Nanjing, China, in Q2.

According to the company, commercial operations at the Nanjing complex, which includes a 600 000 tonne/year naphtha cracker, are scheduled for mid-2005.

Market players are tracking the start of the BASF facility closely, as the global 2EH market is oversupplied.

Savla estimates that the average global operating rate is at 70-80%. However, as China is still importing 2EH, there is room for the new plant. ‘The new capacity will be absorbed as it [BASF] has the advantage of being in China. But it will be hard for the entire industry because the bottom line is that there is no need for new capacity.’

Rationalisation is taking place, but more closures might be needed if all the projects that have been planned for 2EH and butanol materialise.

European Oxo (Eoxo), the joint venture between Degussa and Celanese, plans to shut a butanol plant in Marl, Germany, by the end of 2005. The closure has been described as part of the company’s efforts to refocus its activities on Europe, and also because of a looming oversupply problem in Asia.

Eoxo expects new butanol plants with a total capacity of around 470 000 tonne/year to come onstream in Asia by 2006, which would make it unprofitable for the company to ship product from Asia.

Output from the plant, which has a capacity of more than 100 000 tonne/year, is shipped mainly to Asia with a small portion going to North America.

When will margins improve?

Given the almost continual rise in feedstock costs, can producers hope for an early recovery in margins?

Propylene pricing has been high in the main oxo-alcohol supplying areas (in Europe, the US, and Asia) for some time, and continuing increases in 2EH and butanol prices have not kept pace with rising feedstock costs, points out a consultant.

‘The cost pressure is very strong for us. The prices of oxo-alcohols are high now, but when we compare it with raw-material costs, our margins are squeezed for both 2EH and butanol,’ complains an Asian producer.

Opinion is divided on whether producers will see an improvement in profitability this year.

This will, to a large extent, depend on how propylene costs move.

‘There is one view in the industry that propylene pricing, at least in the US and Europe, may plateau or even fall off somewhat. But this is by no means certain,’ says the consultant.

Barnes of Eastman is hopeful of an improvement because it took time last year for producers to catch up with the feedstock-cost increases. ‘The costs took off in the beginning of the year. But many producers were slow in implementing price hikes.’

The first Asian producer is less optimistic, especially for 2EH, given the capacity additions by Qilu Petrochemical and Jilin Petrochemical in the second half of 2004 and the expected start-up of BASF’s new facility in Q2.

Qilu brought onstream facilities for producing 171 200 tonne/year of 2EH and 19 600 tonne/year of iso-butyraldehyde in November. With the new capacity, Sinopec, the parent company of Qilu, became the largest oxo-alcohol producer in China with a total capacity of 340 000 tonne/year. And Jilin started production at a 128 700 tonne/year butanol plant in August 2004.

Whether 2005 will turn out to be better than 2004 will also depend on the Chinese plasticiser market, which saw massive capacity additions last year.

David Jiang of Sinodata Consulting says China had 110 producers of DOP at the end of 2003 with a total capacity of 1.2m tonne/year.

The second Asian producer estimates that 660 000 tonne/year of DOP capacity was added in 2004, and he expects that another 570 000 tonne/year will be added this year. Many of the plants are small, and it is doubtful if they can start up on schedule, especially if raw-material costs remain high. But competition is certainly set to increase.

Taiwan’s UPC Technology says it commissioned an 80 000 tonne/year DOP facility in the Zhenjiang Economic Development Zone, Jiangsu, in January. In August-September, UPC plans to commission a new 40 000 tonne/year line in Zuhai, where it already has two lines with a total capacity of 80 000 tonne/year. Both the lines were brought onstream in 2004. Also in the pipeline is a 60 000 tonne/year phthalic anhydride (PA) plant in Jiangsu that is due in the fourth quarter.

Singapore’s Continental Chemical aims to start operations at a 120 000 tonne/year DOP and an 80 000 tonne/year PA plant in Zuhai by the end of this year or early next year.

And Henan Qingan Chemical Hi-tech says it will complete a 150 000 tonne/year plasticiser plant and a 50 000 tonne/year PA plant in Jiaxing, Zhejiang, by the end of this year (see page 20).

The plasticiser facility includes capacities for DOP, di-isononyl phthalate (DINP) and di-isodecyl phthalate (DIDP). But Henan, which already has the capacity to produce 100 000 tonne/year of DOP and DIDP and 60 000 tonne/year of PA, has yet to fully secure financing for the project.

A few companies have encountered problems in implementing their plasticiser projects.

Zuhai Yide was forced to delay construction of a 120 000 tonne/year DOP plant in Zhangzhou Gulei Port Economic Zone in Zhangzhou because of problems in securing land approval. A new start-up date has yet to be set.

Shijia Chemical has decided to drop its 50 000 tonne/year DOP project in Haicang, Xiamen, Fujian. According to a source close to the company, Shijia’s PA plant has not been doing well, and the company may have decided to turn its attention to other businesses.

But this is not to say that the demand prospects for plasticisers are not bright for China. In fact, led by China, Asia is the fastest-growing market globally.

Degussa’s Schwarz says: ‘In Asia, we see an annual growth rate of about 5% for plasticisers. But China alone is growing by 7-10%/year.’

ExxonMobil’s Davis says: ‘We believe global demand for plasticisers will continue to grow broadly in line with overall economic growth. If the trend that began in the 1990s continues for plasticisers in the Asia-Pacific, the region could represent nearly 60% of global demand by 2010.’

Barnes points out that most of the products are mature, growing in the 2-3%/year range in most regions. ‘But Asia is an exception, particularly China where it is growing by 8-9%/year.’

Tecnon OrbiChem is looking at a growth rate of around 8%/year for phthalate plasticisers in the medium term, but it sees growth at nearer an average 2% in most other world areas and even less in the US, Europe, and Japan.

Driving Asia and the world forward will be China’s growing appetite for polyvinyl chloride (PVC). According to Sinodata, Chinese demand for PVC rose by nearly 9% in 2004 to 7.1m tonne, and it is forecast to rise by about 8% to 7.7m tonne this year.

According to CMR, which will soon be completing a study on flexible PVC, almost 80% of plasticisers are used for flexible PVC applications. The demand for plasticisers will follow the growth of this segment, points out Savla.

Sinodata’s Jiang estimates that China’s DOP consumption was 1.119m tonne in 2003 with local supply accounting for around 65% of demand. Last year, China imported 397 000 tonne of DOP.

He is bullish about the future, predicting a 10%/year growth with consumption projected to reach 1.77m tonne in 2008.

DOP vs DINP

But does DOP continue to face competition from DINP?

While saturation is believed to have been more or less reached in the developed countries, for example in the US, Europe, and Japan, how replacement will proceed in Asia remains a significant factor. Asia, particularly China, has traditionally been a DOP user. But potential increased availability of INA/DINP and attractive pricing could provoke notable substitution in Asia also, points out the consultant.

In the US and Europe, DOP has largely been replaced by other general-purpose plasticisers such as DINP and di-isodecyl phthalate (DIDP) in most applications other than medical.

In China, the popularity of DINP for food and medical applications is growing. Consumption was 110 000 tonne in 2003, with local supply amounting to only 60 000 tonne. Jiang expects annual demand to rise by 12.7% to reach 200 000 tonne in 2008.

A deciding factor will be price. When it was introduced, DINP was priced higher than DOP. But with producers gaining economies of scale, prices have dropped to DOP levels.

DINP might be considered better than DOP if the prices of the two products are similar, but it might not be so if it is expensive, points out Savla.

DINP has traditionally scored over DOP in the environmental debate. Environmental concerns about the alleged toxicity of phthalates have mainly targeted DOP so far, although the EU decided last year to restrict the use of DINP and five other plasticisers, including DOP, DIDP, dibutyl phthalate (DBP), benzyl butyl phthalate (BBP), and bix (2-ethylhexyl) phthalate (DEHP), in toys and childcare items intended for children under three years old that can be placed in their mouths, or if the substances are used in concentrations greater than 0.1% in the plasticised material. But this market segment is relatively small and not expected to have a major impact on DINP demand.

Davis points out that DINP has grown in use globally to become the preferred general-purpose plasticiser for customers in many parts of the world. This is particularly the case for use in finished products for export in the large China market. The recent European risk-assessment conclusions for DINP and DIDP were favourable in regards to Category 2 labelling or health-risk reduction needed for current uses, he adds.

Barnes of Eastman believes some end-uses of DOP are more vulnerable to DINP. But the lack of availability of DINP could hurt replacement.

INA is so short that it has capped substitution. A customer would not wish to convert to DINP if its availability is uncertain, says Barnes.

Global INA capacity is around 950 000 tonne/year, and there are only a few producers, with ExxonMobil being the largest, followed by Oxeno, which has a total capacity of 340 000 tonne/year. The other producers are Kyowa Hakko, Nan Ya Plastics, BASF, and YPF of Argentina.

A DINP producer agrees that availability of the product is an issue these days because of tight supplies of INA.

Schwarz says INA is enjoying strong demand worldwide, and in particular in Europe where DINP demand is larger than DOP.

‘In Asia too, we cannot serve market demand. The situation was foreseen. DINP has certain advantages over DOP. If the customer has a choice, he would prefer DINP if prices are similar to DOP or if there is a reasonable premium,’ he adds.

Schwarz believes that the tight supply situation will continue, as there are no large INA projects in the pipeline.

ExxonMobil has announced plans for an expansion at Singapore where the capacity of its 180 000 tonne/year plant will be raised to 220 000 tonne/year by the third quarter of 2006. The plant, which was started in 2001, had an initial capacity of 150 000 tonne/year.

Last year, ExxonMobil expanded its DINP plasticiser facility in Panyu, China, to 90 000 tonne/year from 40 000 tonne/year.

Davis points out that these projects justify the company’s commitment to supply the largest and fastest-growing region for PVC plasticisers. ‘Further expansions may come if they are viable,’ he adds.

Schwarz says Oxeno has no plans to debottleneck its plants, but it is looking at investment opportunities in Asia for INA. ‘This is in the early stages and it will not happen in the next two to three years,’ he says.

So what is holding back more INA projects?

Availability of technology is probably an issue, as is the availability of feedstock, which would influence the economics of a project.

Davis points out that alcohol is the largest and most capital-intensive component in the plasticiser supply chain. ‘ExxonMobil’s Singapore expansion is the only new alcohol capacity addition that has been announced for start-up in future years. Feed availability for alcohol versus other derivatives appears to be a key factor,’ he says.

And as plasticiser demand rises, average alcohol capacity utilisation will also increase and the demand-and-supply balance will become much tighter, he adds.

In the end, a more balanced demand-and-supply situation for all oxo-alcohols is perhaps the best bet for an improvement in margins – at least for as long as the current upcycle in olefin prices lasts.

DOP imports by China

	2004	Jan-05
Hong Kong	758	50
Indonesia	4006	-
Japan	50 500	52
Iran	4964	-
South Korea	169 755	20 347
Taiwan	125 525	10 834
Germany	117	8
Singapore	11 688	2339
Malaysia	3757	20
Others	26 572	204
Total	397 642	33 854
Source: Industry

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