OUTLOOK '06: Positive start for Euro aromatics

30 December 2005 11:54  [Source: ICIS news]

By Barbara Ortner

BASF plans styrene shutdown at LudwigshafenLONDON (ICIS news)--The European aromatics industry will start the New Year in a positive mood, after seeing some record high prices and extreme volatility during the past year.

High crude oil prices, which were the main driver behind the massive benzene price hikes in the first quarter of the year, look set to remain in place during the coming year. However, the link between daily fluctuations on crude and those on benzene was severed in March, as the weakness of derivatives demand took over as the key factor influencing benzene.

Benzene spot prices have careered between $600/tonne free on board (FOB) Rotterdam and $1,200/tonne FOB Rotterdam over the last 12 months, and the derivative markets have found this instability to be completely unmanageable.

Styrene prices have struggled to keep pace, and manufacturers of further downstream products such as polystyrene (PS), expandable polystyrene (EPS), acrylonitrile butdiene styrene (ABS), styrene acrylonitrile (SAN) and styrene butadiene rubber (SBR) have been unable to pass on the increases. Many producers have been forced to reduce production or even bring it to a halt for months on end. This picture is set to continue in the coming year, market sources said.

Benzene, styrene and polystyrene prices in 2005


European phenol producers had no difficulty in passing on the full benzene increases, since the phenol contract price is structured to include automatically the price fluctuations of the monthly benzene contract price. But phenol derivatives had a much harder time. Downstream margins have been seriously eroded, so cutbacks and temporary shutdowns will be a constant theme in these markets too.

Benzene, phenol and bisphenol A contract prices in 2005


The global benzene shortage will continue throughout 2006, as a result of years of under-investment in new production capacity. Worldwide expansion of benzene derivatives plants has out-stripped the supply of benzene, so utilisation rates and prices are likely to remain relatively high. This will be the order of the day until major new building projects in the Arab Gulf, particularly Iran, come onstream in 2007-2008.

The monthly contract pricing in the aromatics markets is here to stay. Benzene producers were the first to wrest themselves away from quarterly contracts, and were the first to profit from the ability to quickly recoup the sharp energy increases of the last two years. Despite months where dual settlements confused the industry (May 2004, July 2004 and December 2005), the system is widely accepted as the most suitable for current market dynamics. Orthoxylene (OX) will make the move to monthly contracts in January 2006.

Cyclohexane is still using a quarterly contract delta over benzene, on top of the monthly benzene contract price, but this system is rapidly falling out of favour. Various proposals have been made to establish a system more to the liking of the industry, and it is probable that a solution will be found in the coming year.

European styrene contract pricing remains far from ideal, and it seems unlikely that this will be resolved in 2006. No single styrene contract price has the following of the entire industry, so players are divided between following the free delivered (FD) barge contract or the free carrier (FCA) contract price. Players constantly complain that the FD contract is settled by players with no involvement in the major derivatives, or that the players are not large enough to be representative. They also say the FCA contract is only valid for smaller consumers and one producer, but no moves have been made to consolidate the industry around a single reference contract price.

The monthly toluene contract price is also falling into disuse, and could well be abandoned in the coming year. So few players are now involved in settling monthly contracts, that there is no single reference number, and contract partners usually reach agreement in line with the spot range of the last week of the month, priced in US dollars. As a reference tool, the contract price is generally considered to have become irrelevant.

Unplanned plant shutdowns were the main cause of the huge spikes in styrene and benzene prices in 2005, and this will again be the case in 2006. Even extensions to planned shutdowns had an extreme impact on spot prices. Two important styrene shutdowns are scheduled for April 2006, for Ellba at Moerdijk in the Netherlands and BASF at Ludwigshafen in Germany. Concerns about covering for these outages could keep styrene spot prices firm during March and April.

Arbitrage opportunities will be a key influence in keeping European aromatics prices at a relatively high level. During 2005, there were some major shipments of benzene, toluene, cyclohexane and styrene from Europe to the US, particularly in the aftermath of the September hurricanes on the US Gulf coast. Sudden spikes in toluene and styrene prices were seen at various times of the year when prompt shipments had to be filled for shipment to India (toluene) or the US (styrene). Chemical tanker freight rates look set to remain high due to the worldwide shortage of suitable vessels.

Inventory levels will be kept low, as both producers and consumers adhere to just-in-time delivery schedules. This means that any unplanned plant outages will impact on the market much sooner than they would have in previous years, when players kept buffer stocks.

Aromatics traders will continue to be at the sharp end of the wild price volatility, and it is unlikely that the coming year will do much to swell their numbers. Although great rewards can be reaped from being on the right side of sharp price movements, both up and down, traders are the first to admit that the risk of being on the wrong side is much greater.

The past year has seen some established traders in extreme difficulty and a reduction in the number of European benzene brokers to three from five. The days of purely opportunistic spot traders are over, and the future trend is for more involvement in longer-term contracts, in diversifying into distribution business and in safer back-to-back transactions.

Extreme price movements on aromatics, both within the week and within the day, will continue to be the trend, mirroring the energy markets, market players said. The demand for fast-moving price information will increase, with the industry demanding not only real-time price updates but also daily price reports with official price assessments, based on trading throughout the day, for use in contract negotiations.

Changing market fundamentals and company realignments will keep the demand for industry educational functions strong, supporting regular events like the European Petrochemical Luncheon (EPL) and annual ICIS Aromatics Conference.

By: Barbara Ortner
+44 20 8652 3214

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