FocusEurope PS sellers fight to avoid big losses

06 November 2008 18:03  [Source: ICIS news]

By Peter Salisbury

LONDON (ICIS news)--Polystyrene (PS) producers are targeting November decreases of €150-200/tonne ($195-260/tonne - some €300-350/tonne below upstream styrene drops - to avoid severe stock devaluation and losses in the tens of millions of euros, they said on Thursday.

“Stock devaluation is a big element to the announcement of this reduction,” one source said in reference to a statement released by INEOS Nova on 5 November.

That statement said: “The expected large falls in contract styrene pricing will have such a negative effect on financials due to stock devaluation [that] we have no other option than retaining a significant proportion of the fall in styrene price.”

“I am absolutely certain that from a rational standpoint it is rational to make €180/tonne the absolute maximum decrease,” said the source.

November styrene contracts had been settled at decreases of €456-530/tonne, with settlements at €580/tonne FD (free delivered) NWE (northwest Europe), €700/tonne FD NWE and €710/tonne FD NWE.

INEOS said that, effective 6 November, they would reduce PS prices by only €150-180/tonne.

This was in line with an INEOS statement made the previous week and producers’ evaluations, which expected price reductions of €150-200/tonne.

“As you can appreciate, the amount of money producers will lose is significant – it’s in the tens of millions,” said one source at a major producer who declined to be named.

“This isn’t so that we can pocket the margin; it’s simply to mitigate the stock devaluation. We still lose money.

“The industry, instead of losing €50-60 million will now lose €25 million.”

Central to the argument was the volume of stocks producers maintained in order to “maintain a reliable service,” said a source.

A number of sources said that anything from 20 to 22 days’ stock were held at any one time. These stocks were instantly devalued by a lower contract settlement. 

In the case of such a sharp drop, this could lead to “genuinely destructive” losses, said one producer source

“If you look at the [PS] market in Europe, which is about 2.3m [tonnes/year], that gives you a 190,000 tonnes/month. Divide that by 30 and multiply by 22, say, and you have 140,000 tonnes,” explained another producer source.

“If you take the decrease on styrene as €500/tonne on average, then you get €70m. We just can’t swallow these losses.”

Another source agreed: “It was clear that there was going to be a significant drop and we don’t want to see a landslide effect.

“The situation is so uncertain that we are proceeding with caution.  This is the one opportunity that we have to put margins back into production.”

Consumers, meanwhile, said that while they understood their counterparts’ concerns, their expectations were for far greater decreases.

“I think it would go down €300/tonne for the month,” said one consumer, adding that producers were “whistling in the dark” if they expected to retain so much margin. 

Another source said that there was the possibility for a lower decrease in November if producers could be held to pass on the rest in December and January. “If spot jumps in November, though we wouldn’t want them trying to use that,” he said.

Regardless of their positions, players said that the “unprecedented” drop in styrene values, widely held to be the greatest ever seen in monthly contracting, had produced a completely unique scenario.

“November could be a watershed for a lot of things,” said one producer source. “This could really put someone out of business.”

Added a consumer source: “This is the most interesting month I have ever seen. It will take a lot of resolve to get through it.”

($1 = €0.77)

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

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