OUTLOOK '10: US styrene goes back to the future

28 December 2009 18:30  [Source: ICIS news]

Back to the future for US styreneHOUSTON (ICIS news)--Capacity reductions, thin margins and sluggish demand recovery in the 2010 US styrene market will hearken to the mid-1980s, when the economy was in recession and styrene plants were trading hands.

“This is the 1980s all over again, it’s no different. It will take 5-6 years to clean it all up,” said a veteran styrene producer, referring to the problem of oversupply and low demand that has choked domestic profit margins in recent years.

Back then, as now, styrene production in the US Gulf could be likened to a game of musical chairs.

Some players sell plants, some players buy plants, and some players get stuck holding unprofitable plants that must be closed down.

Market participants in 2009 talked about Dow’s permanent closure of 680,000 tonnes/year of styrene at Freeport, Texas, and speculated that a second world-class styrene plant would need to close to balance the US market.

INEOS NOVA’s 530,000 tonne/year Texas City plant in Texas was idled during the fourth quarter of 2009 due to unprofitable economics but a company spokesman said restart was planned for early January.

A competing US styrene producer said: “If [INEOS NOVA] had not done the reinvestment at Texas City earlier this year I might say they wouldn’t be back. But after the investment in catalyst improvement and clean-up work from [2008] hurricanes I’d say they will restart.” 

The current market dynamic is not unlike two and a half decades ago, when Monsanto sold to Sterling’s Gordon Cain a separate Texas City plant that was eventually closed.

A now-defunct company called American Hoechst also left the market in the mid-1980s when it offloaded styrene assets to Jon Huntsman, who made millions from such acquisitions in the following years.

“The names change but the stories remain the same,” a producer said.

Economic slowdown in recent years was to blame for the market reliving its past, buyers and sellers said.

“A lot of companies didn’t expect the recession to last this long. At some point there may not be enough cash in your bucket. To survive you need someone bigger supporting you,” a buyer said.

A producer agreed, “People have cut back as much overhead as they can and they’re at this breakpoint where they’re just looking at costs and trying to minimise losses.”

While US styrene producers await stronger domestic demand, they will look to exports for margin improvement, just as they did in early 2009.

“There will be a bump in Q1 [feedstock] benzene due to anticipated styrene demand increase in Asia related to steam cracker turnarounds there,” a US seller said.

Turnarounds in Asia will make the styrene chain tight for the first part of 2010, the seller said, adding this will be good for US exports.

In the words of Doctor Emmett Brown in the 1985 US film Back to the Future, “where we're going, we don't need roads.”

Large sea-going vessels rather than domestic trucks or railcars will be the only answer to styrene’s demand woes in 2010, although exports cannot fully eliminate the US’ oversupply of styrene.

In the first ten months of 2010, the US was a net exporter of styrene by about 800,000 tonnes, according to data from the US International Trade Commission (ITC).

US participants say the domestic market was oversupplied by more than one million tonnes even when local demand was at relatively stronger levels.

Producers would rather ensure profits through fixed monthly contracts to US buyers, but failing this they scrape a margin from often less-profitable exports.

Domestic buyers and sellers of styrene contracts may also see old-fashioned changes in contract structures.

A global producer predicted that styrene contracts may begin reverting to a margin sharing system, meaning sellers will share half the margin-over-cost with their consumers.

Margin sharing has not been a preferred style in the US since cost-plus contracts were reliably profitable, the global producer said.

“The poor buyer used to get pummelled by management about needing to buy cheap spot instead of contracts settled on a cost-plus basis. Over the past 18 months it has reversed so that spot is a lot higher than cost-plus contracts, so the market is looking for something that kind of blends the two,” the global producer said.

Contracts designed on a margin sharing system will allow buyers and sellers to mitigate the relative impacts of abruptly higher or lower costs, which supporters of the move hope will ease the associated threat to long-term profitability.

With all the talk about plants closing and sellers looking abroad to find profits it is hard to see how US styrene will move forward at all.

But veterans said they are not worried.

A long-time market participant laughed when asked whether there was a future for styrene amid all the challenges.

“We are still growing. People are still having kids. But just as before, it takes time to see this demand,” a market participant said.

“When you finally hit it, just as in the early 1990s, prices will shoot up and you won’t even be able to get styrene,” the source said.

For more on styrene visit ICIS chemical intelligence
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