12 January 2006 11:22 [Source: ICIS news]
By Edward Cox
LONDON (ICIS news)--Volatile feedstock costs and patchy demand remain key challenges for European phenol and acetone buyers and sellers this year as speculation grows about the impact of new capacities due online in the fourth quarter.
The two markets ended 2005 on a weak note and with little sign of immediate improvement heading into the New Year.
Wild fluctuations in benzene prices were passed on directly to monthly phenol contracts, leading to difficulties for both buyers and sellers in managing businesses successfully. With a lack of export opportunities for phenol out of Europe likely to continue, cutbacks in production may well be a theme of 2006.
Weakness in the key downstream bisphenol-A (BPA) sector, which consumes around 42% of West European phenol, already triggered major sellers to reduce operating rates to between 80-90% in the second half of 2005, to avoid a build-up of stock. Asian BPA exports created an oversupply of material in Europe and caused BPA contract prices to fall, on average, Euro335/tonne from July to December.
European 2006 benzene, phenol and BPA contract prices
Despite this weakness, phenol producers were optimistic that demand for BPA would pick up again in 2006. Two suppliers expected phenol offtake to increase by around 3.5%, with BPA up 4-4.5%. A major BPA consumer, which agreed with the latter figure, said the outlook for downstream polycarbonate (PC) demand from Asia for European material was very healthy, with double-digit growth expected to continue in the region.
Other consumers said such predictions were wishful thinking. Lower production of textile nylon fibre meant a slowdown in caprolactam business in 2005, with growth put at best at 1% for 2006. The more stable phenolic resins sector will remain a reliable channel for some 22% of West European phenol. But key building and automotive sectors have by no means over performed in recent months.
This year will bring two major plant expansions as Ineos Phenol and Ertisa look to strengthen their market presence. Ineos will increase capacity at its Antwerp site in Belgium to 680,000 tonne/year from 420,000 tonne/year. Ertisa will start a 250,000 tonne/year third line at its Huelva site in Spain to take total nameplate capacity to 600,000 tonne/year. Both expansions are planned for Q4, with little effect expected on the market until early 2007. Buyers said they doubted downstream markets would mop up the new tonnage available.
Acetone buyers were first to point out that these expansions would mean another potential 320,000 tonne/year of material for the European market, which ended 2005 on a seriously weak note as slow demand, a lack of export opportunities and plenty of traded volumes led to a slump in spot prices.
The main focus for the next 12 months will be the evolution of the currently wide gap between contract and spot prices. In Q4, methyl methacrylate (MMA) acetone contracts shot up Euro148/tonne, 87 % of the Euro170/tonne Q4 propylene hike. Over the same period, spot prices fell by Euro120/tonne.
Acetone spot prices vs contract prices in Europe 2006
Major acetone sellers said the role of the small spot market should not be overstated, however, given the high cost of propylene contracts. They remained optimistic that there would be an overall market growth of 2-3% in Europe in 2006.
But the largest producers failed to lift spot prices closer to propylene levels last year because of aggressive selling from non-contract sellers and traders. Spot levels seem bound to stay below contract levels and regardless of acetone availability, if 2005 is anything to go on.
MMA consumers managed to protect or improve margins downstream last year until Q4, when major MMA contracts settled at between a rollover and Euro20/tonne hikes, well below the contract acetone increases. Buyers hoped to steer price discussions away from focussing on propylene feedstock costs and more in the direction of current weak supply and demand.
They said they would try to align prices more closely with the lower levels seen in the US and Asia. The Q4 European range of Euro848-888/tonne free delivered (FD) Northwest Europe (NWE) was well above the 35.50 cents/pound or Euro701/tonne US Q4 barge settlement. End-December Chinese prices were reported at $625-640/tonne cost and freight (CFR) China Main Port or Euro516-528/tonne.
Global MMA trade flows look set to alter to the further detriment of European sellers this year after 173,000 tonne/year of new capacity came online in Asia in 2005 from Lucite and Sumitomo. A lowering of operating rates is the likely knock-on effect.
Elsewhere, BP expects to shut down acetone output at its UK Hull site in late 2006 with the closure of its 30,000 tonne/year DF 4 unit. The company idled its DF 3 unit on the same site in April 2005. The impact on the UK market should be limited as it has long been expected and buyers have had time to secure alternative arrangements.
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