US contract, spot price gap points to shutdowns

25 November 2008 17:26  [Source: ICIS news]

(recast with clarification in paragraph 4 and net October ethylene contract price in table)

A chemical plant in TexasBy Al Greenwood

HOUSTON (ICIS news)--More chemical companies may idle plants and lay off workers, as a a huge US price gap persisted on Monday between contract and spot prices.  

The gap reflects both the steep and rapid drop in crude oil prices and the collapse in demand, said Roger Shamel, president of Consulting Resources, a firm in Lexington, Massachusetts.

"I've been in this business since 1974. I've never seen anything like this," he said.

Spot prices for October ethylene and November methanol trail contract prices by more than 50%, according to global chemical intelligence service ICIS pricing.

Such huge gaps are unheard of, as spot prices typically vary 80-110% from contract prices, Shamel said.

"I don't think we are prepared for a situation where spot prices could go so low," he said.

The steep drop in spot prices reflects the weak global economy, Shamel said. "This economy, as you know, has been in a freefall, the worst we've seen in many generations."

The 15-nation eurozone and Japan both reported a shrinking GDP during consecutive quarters, meeting a common definition of a recession. The US GDP fell by 0.5% in the third quarter, and it will likely shrink again in the fourth.

"I don't think we've seen the bottom of this yet," Shamel said. "I think we are in for some more tough times through the end of the quarter and probably through the first quarter of next year."

As such, Shamel expects that more companies will idle plants.

BASF plans to idle 80 plants and reduce capacity at another 100.

LyondellBasell already has idled an ethylene plant and reduced operating rates at some of its integrated cracker operations. LyondellBasell is now considering a 15% staff reduction.

INEOS has postponed two polyolefin expansion projects after announcing that it would seek covenant waivers from its lenders.

Earlier, Dow Chemical CEO Andrew Liveris warned that US and European companies will likely shut down older plants.

The warnings and announcements come as pricing continues to drop across several chemicals.

Not all chemical players are particularly content about the hefty price declines, as they still have inventory in their tanks bought at higher levels and now can not pass these costs on.

For this reason, some buyers have agreed to less of a decrease on contract settlements to keep the markets steady.

Phenol spot prices fell by 30 cents/lb ($661/tonne, €516/tonne) or 50% to 34 cents/lb just days after disastrous market and energy complex fundamentals eroded 62% of the November feedstock contract benzene settlement. The phenol contract price, however, remains in the low 80s cents/lb range as the contract lags by one month.

For acrylic sheet makers, formulas are based on prices for methyl methacrylate (MMA) prices, not crude oil and propylene prices which are sinking rapidly. Acrylic sheet makers and other downstream producers are now trying to sell product made with the feedstock purchased in the expensive summer months.

“Our customers are seeing the drop in our raw materials and are looking for relief even though we are currently on a quarterly lag. That combination, along with the housing market makes for a very ugly fourth quarter,” an MMA buyer said.

A seller added that prices falling this fast was dangerous to the entire petrochemical chain. A number of production cutbacks were now being heard as a result of massive price drops.

"It's a big problem," a methanol distributor said.

Sellers were not trying to prop up contract prices. Instead, they were "just dragging their feet on the way down".

The following lists the most recent US contract and spot prices for several chemicals:

 

Contract

Spot

Benzene

$1.60/gal

$1.02-1.10/gal

Butadiene

97 cents/lb

50-51 cents/lb

Caustic soda

$1,075-1,145/dry short ton

$960-1,000/dry short ton

Ethanol

$3.85-$3.95/gal

$1.58-1.83/gal

Ethylene

51 cents/lb

19.50 cents/lb

Methanol

140-146.50 cents/gal

60-62 cents/gal

Propylene

28.50-30 cents/lb

16.50-22 cents/lb

Styrene

77.25-82.75 cents/lb

30-45 cents/lb

source: ICIS pricing

($1 = €0.78)

Additional reporting by Landon Feller, Heather Doyle McGuire, Steven McGinn

For more on olefins or aromatics visit ICIS chemical intelligence
For more on BASF, Dow, INEOS or LyondellBasell visit ICIS company intelligence
Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy


By: Al Greenwood
+1 713 525 2645



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