FOCUS: US Feb EPS hike crucial for industry

31 January 2007 00:09  [Source: ICIS news]

HOUSTON (ICIS news)--The outcome of a proposed hike in North American expandable polystyrene (EPS) prices will have key implications for an industry struggling to survive against cheaper imports, sources said on Tuesday.

The current cost for block resins in the US is 85-93 cents/lb ($1,874-2,050/tonne) DEL depending on volume purchase and location of buyer warehouse. The 4 cents/lb hike initiative, which would be effective 1 February, will be tested in a couple of days.

All North American producers have backed the price increase, but the proposal was encountering resistance from buyers due to the declining trend in spot prices for feedstock benzene and styrene monomer (SM).

Buyers also argued that the timing of the hike is poor because it would take effect during the winter months when EPS demand historically declines due to a marked slowdown in construction sector demand from the northern states.

Domestic producers have made life harder for offshore EPS producers and distributors by narrowing the price gap between their products and imports.

The gap was 10 cents or more in 2005, but held to a narrower band of 3-5 cents/lb throughout 2006, according to global chemical market intelligence service ICIS pricing.

The narrower gap has produced slower sales for distributors of imported product because domestic transformers prefer the flexibility of placing orders when the material is needed, while keeping inventories at low levels.

The transformers must wait a minimum of six weeks to receive their orders for Asian imports, which forces them to carry larger inventories.

Some imported beads have gone up by 2.5 cents/lb to 85 cents/lb for deliveries in January and February, further slowing down import sales. But not all offshore material has been affected.

Domestic producers find themselves with the prospect of raising prices and profitability, at the risk of reopening the price gap with imports.

In addition, falling EPS prices in Asia due to approaching Lunar New Year holiday and declines in feedstock values may cause a downward revision of offshore bead prices earmarked for the US, further widening the price gap with domestic product.

One seller of offshore product said on Tuesday it preferred to see US producers go ahead with the February price increase because foreign sellers need a wider price gap against domestic product to revive their sagging sales.

Profitability was a severe problem for the North American EPS industry in 2006 and the evidence abounds.

BASF moved its production plant to Mexico, and fellow producer StyroChem is reorganizing under bankruptcy laws.

Huntsman has been trying to sell its EPS operations for quite a while, and NOVA Chemicals had poor results for its styrene divisions in 2006.

This paints a picture of a highly troubled EPS industry in the US – one that needs better margins to remain viable.

Transformers said that domestic bead production is valuable because it is a secure source of supply. They agreed that if 100% supply were in the hands of offshore producers the industry would be in trouble.

While transformers welcome any reasonable programs to support the domestic bead producers and are willing to pay a premium for local product, as they do today, they will not sign a blank check.

The transformers believe domestic producers brought the current problems onto themselves by not competing with price early in the game, when beads from Asia did not have much market share.

The domestic producers frequently questioned the quality of the imported product and reliability of shipments while keeping a large price differential. As a result, offshore beads achieved a larger market share, widely estimated to be near 30%.

Transformers are uncertain about how long US EPS producers can survive in the current environment, saying this partly depends on cost-cutting measures still available to the producers.

But the transformers are in agreement that North American producers will never be able to match the cost structure of their Asian or Middle East competition. One buying source speculated that perhaps only one domestic supplier might be the ultimate survivor.
By: George Martin
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