30 October 2008 17:45 [Source: ICIS news]
By Peter Salisbury
LONDON (ICIS news)--A 60% drop in November benzene contract values in Europe could lead to “critical” levels of stock depletion throughout the styrenic and phenolic chains, market participants said on Thursday.
“Every producer or consumer with 5,000 tonnes of styrene in stock will lose €2m-3m ($2.6m-3.8m),” a source close to a major consumer said on 29 October.
“Consumers will hopefully have tried to control their stock and get rid of overvalued material while holding off buying until November.”
A spot benzene deal was recorded at $410/tonne CIF (cost, insurance and freight) ARA (Amsterdam, Rotterdam, Antwerp) for November, down $761/tonne from the dollar concept set for the October contract settlement of $1,171/tonne FOB (free on board) NWE (northwest Europe).
In euro terms, at current exchange rates, the deal was equivalent to €320/tonne CIF ARA, €477/tonne lower than the outright euro price set in October of €797/tonne FOB (free on board) NWE (northwest Europe).
The “cataclysmic collapse”, in the words of one trader, was attributed to crumbling energy complex values and extremely poor end-user demand.
In public monthly benzene contracting, a dollar concept has traditionally been set on the basis of business done on the second-to-last day of the month and converted to euros at an officially agreed exchange rate.
Styrene and phenol contracts have commonly followed movements in the upstream markets.
Market participants described the “unprecedented” potential 60% fall in contract values as an issue for industry players and traders up and down the styrenic and phenolic chains, as material produced using expensive feedstocks was instantly devalued.
“It will be an issue for everybody,” said a source at a southern European benzene producer. “It was too high a price to start with.”
“Inventory depletion is always an issue,” said a source at a major styrene producer.
“The market is volatile; it is not benzene that dropped, it is crude. Those people who have big stocks will get burned. Those who are running straight will be better off than the others who didn’t do their homework.
“We know that some money will get burned. Some players might be burned once and forever and others might be OK; those with extraordinarily low stock levels because of proper risk management,” said the source at a styrene producer.
The source added that profitability and margins would be battered for a further two to three months before there is clarity in “real” benzene and styrene values.
“Hopefully there is light at the end of the tunnel and it isn’t a train,” he said.
A styrene buyer and expandable polystyrene (EPS) producer said that the problem was self-perpetuated, with players selling off stocks so they are not stuck with overpriced material, which pushes prices down.
“This kind of drop has never happened before,” said the EPS producer. “People are making it worse by offloading stocks, although we are also trying to offload stocks as much as we can.”
“The collapse is because of pipeline emptying,” agreed another EPS producer. “The thing is the speed at which it has happened.”
Spot benzene and styrene had collapsed more than 60% in value since the settlement of October contracts, with both products trading at five-year lows, down from record highs set in July.
Despite the possible financial damage the settlements could inflict, buyers were adamant that they would see the maximum possible decrease.
“It’s probably an issue but it isn’t a reason to accept any higher value in contracting,” said one benzene buyer.
“I am not aware that anyone would consider settling at a compromise. The October contract was totally away from the market; it was outdated three to five days after it was settled.”
($1 = €0.78)
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