INSIGHT: Will weak dollar doom specialty chems?

08 April 2008 22:06  [Source: ICIS news]

By Peter Salisbury

LONDON (ICIS news)--Be it for business or pleasure, one word is on the lips of every European visitor to the US at the moment: iPod.

It has become increasingly rare that a quick jet across the pond doesn’t involve picking up a nano, touch, iPhone or some other Apple paraphernalia for friends, family or, frankly, a few extra quid when touching down on European soil.

A quick scan on the internet shows why: an eight-gigabyte nano will set the average German consumer back about €190 ($298), while Americans pay $180.

At current exchange rates, this means that lovers of tiny Apple technology in the US are paying €115 - €75, or $118, less than their German cousins.

If we subscribe to The Economist’s Big Mac Index of currency exchange - a bank in Australia now actually has an iPod index - then Hans is probably not paying much more than Steve in terms of the purchasing power of his earnings. 

But if he can take a trip to New York, or pay an extra €20 ($31) for shipping, then he will still save money. On the face of things, it is not a difficult decision: pay more or pay less for exactly the same end product. 

As analysts predict the dollar topping $1.60 or even $1.65, however, the principle that keeps a German benzene producer stylishly entertained could spell disaster for his regional industry.

Specialty chemicals, much like the iPod, have a fixed base of raw material costs. Inter-regional markets are traded in dollars, and many upstream products close to the refinery and cracking stage of production in Europe as in the US and Asia are traded in dollars so as to ease the global interface of markets. 

Given a stable global economy, and hence stable currencies and demand for end-use products, the flow of material between regions on open arbitrage windows should be globalisation at its best: a seamless interconnected stream of supply and demand unfettered by geographical boundaries.

As is the case now, however, poor demand for material and a weak currency in one region could lead producers, traders and distributors to see stronger economies as a lucrative sponge for their end products.

The more upstream the product, the less affected it will be as it will be closer to a US dollar cost base, giving European players a cost advantage on their greater buying power. The further downstream, however, and the more euro costs come into the mix - through administration and manpower.

“If you go to the specialties the cost base is more weighted to personnel and less to feedstocks,” says Tobias Mock, chemicals sector ratings director at analysts Standard and Poor’s. “So the guys who have euro or Swiss franc cost bases, say, they will be less competitive than those with dollar bases.”

Let’s go back to the iPod. The outer casing of the nano is made of a product called polymethyl methacrylate (PMMA), a polymer of methyl methacrylate (MMA). MMA is, in turn, made from methanol and MMA acetone. Acetone is a by-product of phenol production. Phenol is, in turn made from cumene, which is - gasp - made from benzene and propylene.

In Europe, spot and contracted volumes of propylene are sold in euros, while the benzene spot market is traded in dollars and the contract market in euros.

Benzene, in turn, is affected by upstream (dollar) energy markets such as toluene, gasoline and crude oil along with naphtha -also a dollar market.

At the close of business on Tuesday 8 April, benzene in Europe was valued at $1,165-1,170/tonne CIF (cost, insurance and freight) ARA (Amsterdam, Rotterdam, Antwerp) in Europe while in Asia it was valued at $1,090-1,100/tonne FOB (free on board) Korea.

Global chemical market intelligence service ICIS pricing, meanwhile, valued spot methanol and polymer grade propylene in Europe at €235-245/tonne FOB Rotterdam and €820-840/tonne CIF NWE (northwest Europe), equivalent at current exchange rates to $367-682/tonne FOB Rotterdam and $1,281-1,313/tonne CIF NWE on Friday 4 April.

At the same time in Asia, propylene was valued at $1,260-1,300/tonne CFR (cost and freight) southeast Asia and methanol at $370-390/tonne CFR Korea.

We see that at the raw material stage, closer to the dollar markets, there is very little difference in pricing, with Europe slightly more expensive in some areas.

Spot MMA in Asia at this time was valued at $1,880-1,930/tonne CFR Korea, while in Europe it was valued at €1,430-1,520/tonne FD NWE, or $2,245-2,386/tonne FD (free delivered) NWE.

Thankfully for European MMA and PMMA producers, product is tight in Asia - a lot of iPods are made there - and although a paper arbitrage window is certainly open little material seems to have made its way between the regions.

In other markets, however, this has not been the case. A European butanediol buyer recently told ICIS pricing that he now almost exclusively sourced his feedstock supplies from Asia, thanks to a €500/tonne gap between prices in the two regions.

European aromatics traders, meanwhile, have been discussing the import of polystyrene and expandable polystyrene from Asia since early January, with a weak global market making export from the region attractive.

Expected styrene length on the back of outages within Europe in April was yet to transpire with energy costs’ upward pressure on feedstock benzene keeping spot values in the region stable.

But contracts fell €28-53/tonne in April as the weakening dollar meant that a $12/tonne erosion of benzene spot prices in March, which in turn meant a €47/tonne drop in equivalent euro values.

Speaking to ICIS news on 13 March, International Echem chairman Paul Hodges warned that emerging capacities in Asia with lower cost bases could spell disaster for production in Europe, asking the question: “Is this the perfect storm?”

Mock, however, urged caution, saying that the European production was far more resilient than was often assumed. 

“If you had polled five analysts four years ago and asked them what the dollar at one fifty against the euro would mean for production over here they would have told you it was the end,” he said.

($1 = €0.64)

For more on these products visit ICIS chemical intelligence

By: Peter Salisbury
+44 20 8652 3214

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