INSIGHT: Looking for the cycle's low point

27 November 2008 22:43  [Source: ICIS news]

By Nigel Davis

COLOGNE, Germany (ICIS news)--These are challenging times to say the least with little or no visibility for most chemicals producers and their customers. Markets do not appear to have hit bottom and as yet there is no real underpinning for an upturn.

The aromatics value chains are hard hit with product prices ultimately linked to the price of oil, a point that was made strongly at the recent 7th ICIS Aromatics and Derivatives Conference held in Cologne this week.

If the oil price holds at around $50/bbl then large parts of the sector might expect to see the bottom of the cycle around the start of next year.

If oil tracks lower, however, then prices can fall further and the industry will face what one seasoned observer has called a “chasm”.

December will be difficult, without doubt, with plants closed or running at significantly reduced operating rates.

The severity of the downturn has taken the industry by surprise but in some businesses demand has weakened throughout this year before declining rapidly in recent weeks.

“I think we’re pretty much there in terms of [customer] destocking,” INEOS NOVA's styrene business manager for Europe, David Cunningham, said on Thursday.

He would like to think that the bottom of the cycle will come around the end of January or the beginning of February as feedstock and product costs better align.

He is wary, nevertheless, of a further decline in the oil price which some at this conference suggested could take crude to close to $20/bbl.

Life has not been easy for producers in the styrene chain for some time but this year has been especially difficult.

Polystyrene (PS) demand in Europe has dropped 10% since November 2007 although it took six-to-nine months for the market to catch up in terms of price.

“In the last month or so the reality of the market has been felt in pricing,” Cunningham said.

Polystyrene demand is being lost to other polymers such as polypropylene (PP) and polyethylene terephthalate (PET) with the decline in demand generally expected to be 1-2% a year.

The depth of this downturn puts production lines or entire plants in the sector under threat of closure.

Producing companies are not letting demand just slip away and are active in product development but they are also seeing weakness in expandable polystyrene (EPS).

Growth this year has come to a stop when demand growth of between 3% and 5% might have been expected.

Relatively strong demand growth had been expected in eastern Europe but the downturn has forced the INEOS NOVA joint venture to push back plans to build a new 100,000 tonne/year EPS plant in Romania.

This may still be a strategic project but start-up is likely to be pushed out to 2010/2011 from 2010.

The current demand slump helps make a bad situation in styrenics worse.

“Prices are moving so quickly that the underlying position of the aromatics industry is unclear,” Nexant consultant Richard Sleep said at the conference on Wednesday.

Normal trade is being hamstrung by the availability of letters of credit, issues of trader liquidity, inventory and mark-to-market losses. But as he points out, manufacturing industry has not gone away but it is reducing production and cutting costs.

The fall in petrochemical feedstock costs allows the industry to retain margin as manufacturing slows.

But the demand slump will hit companies hard and drive further restructuring. It is perhaps not a question of “if” but “when”?

In past downturns polystyrene plants have closed but it has taken longer for upstream styrene units to shut and help lay the groundwork for an upturn.

Over the next three years, Nexant suggests that five polystyrene plants in Europe might close and two polystyrene manufacturers leave the business.

We might also expect the closure of two to four styrene plants and between four and six benzene units. One styrene producer might leave the business and possibly two benzene producers.

Downturns have always forced change on the sector but one cannot say where this steep dive will take it.

Once at the bottom of the cycle, however, producers will be in a better position to understand just what might have to be done not simply to survive but to prosper over the medium and longer terms.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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