INSIGHT: PS down but not yet out

20 February 2008 15:55  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--Polystyrene (PS), for so long the poor man’s polymer, might be about to get a little margin relief from the tsunami of new styrene capacity due on stream over the next few years.

The relief could be shortlived because of the uncertainty over capacity additions planned for the Middle East after 2012.

And no matter what the extent and duration of the margin benefits from greater feedstock availability is, PS will continue to suffer from fierce competition from polypropylene (PP) and acrylonitrile butadiene styrene (ABS).

The further good news is that there are very few PS capacity additions planned, meaning that the big integrated producers have opportunities to generate reasonable returns from the business in the right market conditions.

But the flip-side of the coin is that low demand-growth prospects are why so little investment is taking place.

The Middle East is responsible for most of the new styrene capacity planned for start-up by 2012.

In 2008 alone, for example Nexant ChemSystems estimates that as much as 1.75m tonne/year of styrene could be brought on stream - including, for example, 700,000 tonnes/year at the new CP Chem complex in Saudi Arabia.

Less certain may be plans by National Petrochemical Co to add a second 600,000 tonne/year plant in Iran.

Capacity additions in China until 2010 total 1.87m tonne/year, resulting in an expected temporary dip in the country’s import requirement to below 3m tonnes in 2010.

But Nexant Chem Systems forecast the deficit would rise to more than 4m tonnes in 2015.

The problem for PS producers is the uncertainty over new Middle East styrene capacities post-2011. Nexant categorised 2.6m tonnes/year of this potential new tonnage as speculative.

“Further developments in the Middle East will depend on the availability of benzene, which will be tied largely to new refinery projects,” said Lee Fagg, a consultant with Nexant.

Refinery cost overruns have been huge of late. In addition, there are doubts over the economics of building refineries integrated with aromatics complexes versus the much stronger case for further gas-based petrochemicals (provided you can find the gas).

But the biggest issue for the PS industry is low growth. Nexant estimated that the global compound average growth rate was around 2%, while an industry source believed it could be even lower.

“The US market in particular is suffering. Growth has been zero or even negative over the last couple of years,” said the source.

“This is the result of the hollowing out of manufacturing industry, product maturity and more recently, the economic slowdown,” the source added.

However, even in China, the destination for much of the manufacturing drift from the US, growth is at low levels when compared with the other polymers.

Well documented product maturity issues include the death of the video cassette and video-cassette case industries and the fall in demand for CD cases as a result of the online music boom.

“In lower-end applications, such as packaging and disposables, PS is losing out on price and performance issues. Lower-cost materials, with inferior quality to PS, are easily substituted and are fit for the purposes of these applications,” added Fagg.

“For example, if you want a plastic fork or a cup for a barbecue, do you really care whether it’s made from PS or PP? PS may offer higher clarity but is this essential? The answer is very probably ‘no’ as price is the biggest decision-driver,” he said.

As for higher-end applications, such as TVs and washing machines, PS does not have the same visual appeal or strength as ABS.

The commoditisation of ABS through rapid capacity growth has also reduced the cost of what was once an expensive engineering plastic.

“You are increasingly finding a combination of ABS and PS in consumer products. In the case of a TV, PS is more likely to be used for the internal or hidden components (such as the rear casing of a TV) and ABS for the surrounding casing - because of its higher aesthetics and high gloss finish,” said Fagg.

The integrated producers are in theory in a much stronger position because they do not have to worry about buying styrene on the open market.

In practice, however, business units within the big western producers have their own targets. This is further complicated by internal trading operations in styrene. But consolidation has improved product integration in styrenics.

“We have observed changes in buying power throughout the value chain. There are certainly fewer large volume transactions of ethylene and to a lesser extent styrene, than a decade ago,” Fagg added.

A further problem is that ethylene supply has become much tighter, making it easier to maintain margins closer to the cracker.

Selling PS can in contrast be a nightmare because of the immense buying power of consumers.

This is the result of too many suppliers, rebates and discounts that result from large volumes being negotiated and the possibility of product substitution.

Very few producers are, as a result, planning capacity additions. The Plants and Projects section of lists only 21 expansions of existing plants or new plants scheduled to start up by 2012.

Fifteen of these projects are under study, one is at the pre-feasibility stage and engineering work is taking place on a further two. Construction is underway on only two of the projects with the status of one of the projects unknown.

This is fortunate as the industry is blighted by overcapacity, despite the consolidation over the last decade that’s included plant closures.

“The 6.5m tonne/year of Asian capacity ran at operating rates of only 60-70% in 2007. I believe that operating rates will again be below 70% this year,” said the industry source.

“The only reason why integrated producers generated cash margins on PS production in 2007 was because non-integrated producers were not operating,” the source added.

He estimated that 50% of Asian capacity was stand-alone.

So how on earth do you make money in this business? Being tough on customers is one approach through refusing orders that would fail to deliver a cash margin. This only works if you are big enough to afford to turn business away.

Innovation might also be the solution: research and development (R&D) work is taking place at companies such as BASF and Dow Chemical to improve product quality and strength.

Application development work has been geared towards increasing the tensile strength of PS to provide a lower-cost alternative to engineering resins. 

But no matter how much money is spent on R&D, the concern in the industry is that it is likely to remain a "sunset" product.

The biggest ways of generating returns this business could therefore remain cost cutting, efficiency improvements, further consolidation and making your salesmen very unpopular with their customers.

For more on PS visit ICIS chemical intelligence

By: John Richardson
+65 6780 4359

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