FocusConcerns over profitabilty of styrenics

18 June 2008 16:50  [Source: ICIS news]

By Peter Salisbury

 

LONDON (ICIS news)--Potential third-quarter hikes in upstream ethylene are causing concern over the profitability of the European styrenics chain, players said on Wednesday, with poor margins from top to bottom and depressed demand on sky high prices.

 

June ethylene bi-monthly contracts were settled up €75/tonne ($117/tonne) at €1,105/tonne FD (free delivered) NWE (northwest Europe).

 

Buyers and sellers of ethylene, which provides a key styrene feedstock alongside benzene, saw this as a likely outcome for third-quarter settlements.

 

Styrene producers were likely to try to pass down at least some of this increase, players said.  A source at one major producer said that a €100/tonne increase in ethylene, mooted by some producers, would equate to a minimum hike of €30/tonne on styrene.  

 

Since the settlement of second-quarter ethylene contracts, up €15/tonne, monthly styrene had already increased by an average €110/tonne, with June finalised at €1,145-1,190/tonne FD NWE.

 

Players in the styrene and polystyrene (PS) markets had said at the time of the settlement that their already strained margins were now under extreme pressure. One producer had said that, given a €97/tonne increase in feedstock benzene and record high energy costs they were “not even able to cover production costs”.

 

Downstream, weak demand for PS in Europe was being further exacerbated by feedstock costs, players said. 

 

PS was a “dying product”, said one buyer. Another suggested there would be some more capacity cutbacks in the European PS industry in spite of 13% being cut back from the end of 2005 to the end of 2006. PS capacity was thought to currently be running at 80% in the region.

 

Many producers, buyers and traders in the styrene market said that, although no official announcements had been made, the vast majority of producers in Europe had also brought down production levels in line with weakening demand and poor margins. 

 

“The worry is that, if prices stay this high, we will kill end-user demand,” said one buyer.  “And then there is nowhere for the product to go, regardless of cost.”

 

A source at a major European trader, meanwhile, said that not passing the costs on was equally dangerous. 

 

“If we cannot pass them on to the consumer, we are in trouble,” he added. 

 

“I am still of the opinion consumers must get used to the higher prices,” the trader said. “It should still be possible to pass on costs for two or three months. After that, though, I don’t know.”

 

Uncertainty over the future was a key talking point in the market, with the sustainability of current price levels, let alone higher costs an issue across the board.

 

Spot benzene and styrene have been largely driven by energy complex values during the past few months, with both markets seen as largely balanced in terms of supply and demand fundamentals. 

 

Analyst predictions of crude oil trading at up to $200/bbl made the market situation even more precarious, players said.

 

“How sustainable is high pricing?” said one producer.  “It is not easy to say but there is only so much the downstream can take.” 

 

The situation in the PS market did not help, the player added, although expandable polystyrene (EPS) had shown some support recently, with demand in China boosting the global market. 

 

Another producer said that the market was still profitable, meanwhile, and that it was too soon to perform final rites. 

 

“From today’s point of view, people can stay producing on a sustainable basis and still make money,” said a source at one major producer.

 

The source conceded, however, that this was not likely in the long term. 

 

“It is still too early to say if the market is destroyed,” he added.

 

($1 = €0.64)

 

For more on styrenics visit ICIS chemical intelligence
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By: Peter Salisbury
+44 20 8652 3214

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