14 November 2005 00:01 [Source: ICB Americas]
THE NORTH American polystyrene market is still recovering from the effects of the hurricanes on the US Gulf Coast. While no physical assets were damaged, styrene monomer production units have had difficulties sourcing raw materials, particularly ethylene and natural gas, and that has impacted polystyrene production.
With styrene monomer operating rates around 75 percent, polystyrene producers have also had to throttle back production. “Operating rates for solid polystyrene are in the mid-70s,” says John Siegrist, Nova Chemicals Corp.’s vice president of sales for styrenics. “They were even lower than that previously, because of some constrained monomer availability on the Gulf Coast.”
The Dow Chemical Company also acknowledges the lower operating rates, but says they will improve at most Dow plants in North America in the next 30 days.
Although production across the styrenics chain is down, raw material prices are still a leading concern. With ethylene supplies constrained, prices have skyrocketed. Contract prices gained 10 cents in October, leveling off at 54.5 cents per pound, and spot prices soared to more than 70 cents per pound. Natural gas prices spiked to an all-time record of more than $14 per mmbtu.
“The elevated cost of natural gas continues to have a significant impact on pricing,” says Jeff Denton, product director polystyrene, for Dow. “This impact could increase as we head into the winter heating season.”
The run-up in natural gas and ethylene prices has crimped styrene production, forcing a decline in benzene prices. “Benzene pricing has softened a little since October, but only because there is a significant amount of styrene off-line,” says Denton. “Again, the key factor in the market at present is short supply.”
Aside from raw material pricing, overall operating costs have also increased significantly. “With all of the volatility and escalation involved in costs, energy, feedstocks and logistics, the amount of working capital to run a business today versus a few years ago has gone up dramatically,” says Siegrist.
In response, Nova recently informed its customers that its notification period for price increases had changed from 30 days to just 5 days. “At the end of the day, there is no end in sight to the volatility in energy and feedstock costs. Commodity chemicals and plastics companies can not run sustainable businesses and provide technology and assurance of supply if they do not have profitable businesses,” says Siegrist.
The move to shorten notification periods and remove price protection goes against the commodity chemical industry’s historical role as a shock absorber between raw material increases and the consumer. “In the past, commodity chemical companies had been buffers to this volatility. It was one thing to do this when natural gas and oil were stable and it is another thing to think you can provide that feature when there is this much volatility,” says Siegrist.
Since September, polystyrene producers have nominated more than 20 cents worth of price increases. For the most part, producers have gained 5 cent increases in September and October and another 6 cents in November. Producers have another 5 cent increase slated for November 15. It would push polystyrene above 95 cents per pound.
With prices up and operating rates down, polystyrene consumers have used the time to reduce inventory levels and pull maintenance schedules forward, according to Siegrist. The result could be improved performance in the first quarter. “We believe the strong spring season could start in early January,” says Siegrist. “Converters have pulled maintenance schedules forward and reduced output, which has tightened supply of polymers and pulled inventory levels down throughout the chain. We think that will speak well for the first quarter.”
“We expect demand growth of to 2 to 3 percent in 2006, particularly if polypropylene utilization rates remain high and its price delta closes with polystyrene,” says Denton. “Much will depend on the supply and price trend for benzene.”
According to a recent study by Houston-based Chemical Market Associates Inc. (CMAI), demand growth for polystyrene continues to be driven by China. From 2000 to 2003, polystyrene consumption increased by 640,000 tons, while consumption in the rest of the world decreased.
Demand growth in China in 2004 and 2005 is expected to show an increase of 65,000 tons, much lower than in previous years. Slower-than-anticipated demand growth in China and extensive capacity additions created an extreme over-supply situation for global polystyrene.
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