FocusAsia BD nears bottom but recovery will be slow

07 January 2009 05:32  [Source: ICIS news]

By Helen Yan

SINGAPORE (ICIS news)--Asia butadiene (BD) maybe close to bottoming at $360-380/tonne (€266.4-281.2/tonne)following sharp declines in the second half of last year, but its recovery will be slow and gradual as demand is likely to remain subdued in the first quarter given the weakened state of the global economy, traders said on Wednesday.

BD spot prices plummeted to below $400/tonne CFR (cost and freight) northeast (NE) Asia in end-2008 from the peak of about $3,400/tonne CFR NE Asia in July as demand dried up as the global financial turmoil raged and economies around the world struggled to post growth as the credit squeeze intensified from the third quarter of last year.

Prices were down by more than 75% from January 2008 levels.

“Demand for BD will remain weak as demand for cars is unlikely to recover in the first quarter of this year as consumers will cut back on spending on new cars or replacing their tyres in an economic downturn,” a Japanese trader said.

BD is a raw material used in the manufacture of synthetic rubber, a major component in the production of tyres for the automotive industry.

Several major car makers, including GM, Ford Motors, Toyota and Honda have shut down production lines and cut output as vehicle sales slumped as consumers, bracing for the worst economic recession in years, tightened their belts.

General Motors, Ford, Toyota and Honda all registered over 30% decline in vehicle sales in the US in December.

In response to the declining vehicle sales, tyre makers including Michelin, Yokohama, Kumho Tire, Goodyear and Bridgestone have either halted any new expansion project or cut production.

Consequently, synthetic rubber makers were forced to slash operating rates given steep falls in demand for styrene butadiene rubber (SBR) and butadiene rubber (BR) – the major components for making tyres.

Several SBR and BR producers including LG Chem, Korea Kumho Petrochemical Co (KKPC), Shenhua Chemicals of China and Zeon of Japan have either shut down their plants or cut operating rates.

Although demand for BD is expected to remain lacklustre in the first quarter BD producers are unwilling to allow the price to drop further, given the erosion in margins.

Several cracker operators have been operating their naphtha crackers at reduced rates of 80-90% since November last year in a bid to stem the olefins price slide.

Some BD producers such as Formosa Petrochemical Corp (FPCC), SK and Yeochun Naphtha Cracking Centre (YNCC)  and have also channelled their crude C4, the raw material for BD, to making liquid petroleum gas (LPG), a more profitable option than selling BD below $400/tonne CFR NE Asia.

Spot offers have been hiked to $450-500/tonne CFR NE Asia for January shipments, but it seems unlikely that the buyers will bite.

“No customer will pay this price now, it is not workable,” a trader said.

“Customers will not want to pay more than $400/tonne CFR NE Asia as the market conditions are still weak. They also want to cut down production costs to compensate for the high prices they paid for BD last year,” another trader said.

($1 = €0.74)

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By: Helen Yan
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