FocusStyrenics jvs face margin hurdles

01 October 2007 22:52  [Source: ICIS news]

By Al Greenwood

HOUSTON (ICIS news)--Two new styrenics joint ventures will have a difficult time increasing margins to an appreciable degree due to lack of new demand, according to a consultant.

"If there was a demand driver, I think this wouldn't be such a problem," said Greg Smith, global business director, engineering resins/polystyrene (PS)/polyvinyl chloride (PVC) for Resin Technology Inc.

"It's really a case of how can we try to get more profitable in a market that's just not growing," he said.

Demand has been sluggish as more customers are buying polypropylene (PP) instead of PS. In addition, there are almost no new applications of PS being developed.

With the current state of the market, the newest joint venture, INEOS NOVA, plans to reduce styrene capacity in order to increase margins.

INEOS NOVA was formed by INEOS and NOVA Chemicals. The joint venture started operations on Monday.

Another joint venture - created by Dow Chemical and Chevron Phillips Chemical - has yet to elaborate on production plans.

The Dow and Chevron Phillips venture recently received approval by the US Federal Trade Commission. It could be established by the end of the year.

Joint ventures are among the few strategies left to producers intent on increasing margins for styrenics, Smith said.

To improve margins, INEOS NOVA plans to reduce capacity of styrene monomer by as much as 1.7bn lb (771,115 tonnes)/year, company officials said.

Such a move would reduce North American styrene capacity by 11%. That, in turn, will increase operation rates and tighten margins, NOVA said.

"The slack will come out everywhere in the world," said Chris Pappas, NOVA chief operating officer. Pappas made his comments during a conference call held on 25 September.

"Asia and Europe will tighten further as North American exports dry up," Pappas said.

Reducing the capacity will boost margins, Smith said. However, it will not likely have a huge effect.

The best way to raise margins is to increase demand, not reduce supply, Smith said.

"The demand growth prospects for styrene monomer in North America are not good," he said.

Supplies are tighter in European and Asian markets. However, relying on exports is a risky gambit in itself, Smith said.

Nonetheless, the joint ventures could provide the companies with other ways to increase margins, he said. By reducing the number of producers, the joint ventures should gain more pricing power.

In North America, the number of styrene producers will drop to seven from 10 in 2005, according to a presentation by NOVA. The largest four producers will provide 82% of the supply, up from 59% in 2005.

"I think they will be increasing margins, but not dramatically," Smith said. "I think the business will become attractive enough to stay in it."

By: Al Greenwood
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