INSIGHT: Upstream cost pushes wrestle with weak fundamentals

16 November 2009 15:59  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--A tussle is taking place between sellers of styrene and overseas Asian buyers - an example of a wider disconnect between upstream cost pushes and weak downstream fundamentals, says Leonard DeGuzman, Philippine-based consultant with DeWitt & Co.

“The Japanese traders, on behalf of the country’s producers, want to settle contracts for 2010 supplies as soon as possible, ideally by December, so they can get as favourable an alpha number as they can,” he said.

“Some buyers seem to be willing to hold out until January or February,” added DeGuzman.

The fear being peddled as part of efforts to push through a quick settlement is crude oil might go even higher. Some forecasters are predicting $100/bbl by Christmas.

Japanese and South Korean producers meet around two-thirds of China’s import needs. The South Koreans are more driven by spot pricing.

Another argument being pushed for a quick contract deal is that poor refinery economics outside China will limit reformer-based benzene availability.

Japanese and South Korean refiners were running at around 70% of capacity because of weak gasoline and diesel crack spreads, said DeGuzman.

But the big state-owned Chinese refiners are operating at roughly 90% - and smaller independents at slightly less - due to fuel-price liberalisation, which has boosted profitability.

China is also bringing on stream 610,000 bbl/day of new refinery capacity in 2009, according to the Shanghai-based oil and gas information service C1 Energy. A total of 3.7m bbl/day is due to start up in 2009-13.

There were two other justifications for buyers to play the waiting game, added Guzman.

The Kuwait Styrene Co, an Equate subsidiary, started commercial production at a 450,000 tonne/year ethyl benzene/styrene plant in Shuaiba, Kuwait, in August.

Pars Petrochemical is due to bring a 600,000 tonne/year styrene plant on stream in Iran in the first quarter of next year, according to some industry observers. The facility was originally due to start up this year.

Iran has a poor track record of stabilising production at new plants because of a lack of sufficiently experienced engineers, a result of the nuclear dispute with the west restricting overseas recruitment.

The second further reason to stall was what DeGuzman described as “very weak downstream demand in all the big derivatives – acrylonitrile butadiene styrene (ABS), polystyrene (PS), expandable PS (EPS) and styrene butadiene rubber (SBR)".

EPS had a good first half, but DeGuzman said: “Demand has since declined. It’s now the down season for construction because its winter, but even taking this into account, consumption is very poor.”

Spot PS and ABS prices have been stagnant over the past few weeks while feedstock costs have increased, according to global chemical market intelligence service ICIS pricing.

SBR has been hit hard by the US decision to levy 35% import tariffs on Chinese tyres.

“Spreads are very good between benzene and styrene – approximately $240/tonne. This is on the snug side of comfortable and much better than earlier this year when they fell below $200/tonne,” DeGuzman added.

“The spreads further downstream are a lot weaker. General purpose PS (GPPS), for instance, has been struggling to maintain an $80/tonne spread over styrene since late September.”

His comments about weak demand fundamentals are common to the refinery industry and many chemicals and polymer chains.

Despite all the bullish growth numbers from China, there is a gap between the expectation of recovery – already priced into crude and equity markets – and actual production and consumption.

“My worry is that it’s all cost-push at the styrene end of the chain and so buyers run the risk of repeating the mistakes of H2 2008, but of course on a much smaller scale,” said DeGuzman.

Back then, everybody at every point in every chemicals production chain was left holding excess high-cost inventories as crude tumbled and the global economy ground to a halt.

He expects the fundamentals of styrene to remain weak in January and February, but to then tighten in the second quarter as a result of a large number of Japanese turnarounds.

A total of 58,000 tonnes of US material is due to arrive in Asia in November and December this year – a big factor behind expectations of a long market in the first quarter of next year, said DeGuzman.

But some 300,000 tonnes of Japanese production will be lost in April-May alone because of maintenance work, he added.

He expects a heavier turnaround season in Japan in 2010 than this year.

The supply wildcard throughout 2010 is likely to be how the new Middle East supply runs.

Europe will, for example, import around 85,000 tonnes of styrene in 2009, but this will rise to about 100,000 tonnes in 2010 because of plant closures.

“This further shortfall should be met by the new Middle East plants. If this doesn’t happen it will be met by the US and Asia.”

The market could be further lengthened by more stable operations at Chinese plants. Production problems during 2009 were unlikely to be repeated next year, he said.

“There should be a major downward correction in styrene in June-July once the Japanese Q2 turnaround season is over,” warned DeGuzman.

“Unless, that is, there are stronger signs of real demand catching up with crude and equities.”

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

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By: John Richardson
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