FocusFears that global ACN prices face downward correction

12 February 2010 17:38  [Source: ICIS news]

By Mike Nash

LONDON (ICIS news)--Fears that global acrylonitrile (ACN) prices have risen too far, too fast and were headed for a major downward correction following the Chinese Lunar New Year holiday have dominated market discussions, sources said on Friday.

In Europe, ACN spot prices, currently assessed at $1,970-2,000/tonne (€1,438-1,460/tonne) CIF (cost, insurance and freight) WE (western Europe), have risen steadily due to tight supply and firm values of feedstocks propylene and ammonia during 2009.

However, following a succession of production outages, the rate of increase rose dramatically in the fourth quarter of 2009, the most significant of which was INEOS Nitriles’ declaration of force majeure on ACN production at its 300,000 tonne/year facility at Cologne, Germany, in January.

The announcement of force majeure on ACN, which is still in force, was in turn prompted by the declaration of force majeure on propylene at the Cologne site back in December, which has since been lifted.

This came at a time when the European ACN market for was already tight, with production issues earlier reported at INEOS Nitriles’ other ACN plant at Seal Sands, UK, and at Lukoil’s 150,000 tonne/year plant at Saratov, Russia.

Indeed, of Europe’s estimated 1.26m tonnes/year of ACN capacity, over 150,000 tonnes/year of capacity in Bulgaria and Spain had not been running for several months due to raw material and uneconomical production issues.

The shutdown at INEOS’s Cologne facility effectively took another 25% of Europe’s capacity out of commission.

The situation was exacerbated by strong demand in Asia pulling in product from the US, rather than to Europe, and a rise in contractual demand from non-fibre sectors.  

This “perfect storm” resulted in spot prices rising in Europe by nearly $500/tonne in the fourth quarter alone.

However, there was a sense in the market this week that prices may have finally reached their peak, and that levels above $2,000/tonne CIF WE were unsustainable.

“Fibre producers will struggle to make a profit at current production economics and current fibre prices,” said one seasoned trader.

Another trader said: “[ACN] prices have jumped too far, too fast.”

Even producers acknowledged that, given current fibre prices of around €1.80-1.90/kg, the margin for fibre producers was negligible, given current ACN prices.

The catalyst for these comments was a report this week that Brazilian producer Acrinor had sold a cargo of ACN at $2,200/tonne FOB (free on board) to a trader.

Many traders doubted whether this business had even taken place, with one saying the price was “a crazy number” and that it seriously doubted the wisdom of any trader that had taken a position on the cargo without selling it.

However, there were reports of $2,300-2,400/tonne CFR (cost and freight) in India having been paid, which would imply FOB netbacks of around $2,200/tonne, given current freight rates.

One trader speculated that it was in fact Russian material that had been sold to India at this level, but acknowledged that $2,400/tonne CFR (cost and freight) was the benchmark price in India now.

This price theoretically implied a substantial jump in European CIF prices based on current FOB levels out of the major supply routes, but many sources described European prices at $2,300/tonne CIF WE as unrealistic and impossible to achieve.

This led to a hiatus in the European market, with buyers reluctant to take positions on high-priced product for March shipment for fear of a possible market correction after the Chinese Lunar New Year. As a result, some buyers were adopting a wait-and-see attitude.

All sources said that it would be difficult economically for fibre producers to pay much above $2,000/tonne CIF WE without going into negative returns. Some speculated that fibre producers would cut back on production rather than pay such high prices.

Sources described product as undeniably tight. One Mediterranean fibre producer said that it was running on a “hand-to-mouth” basis, and that any further delay to shipments from Russia (caused by icy conditions in the Baltic Sea region) would result in further fibre production outages.

This was not viewed as an isolated report. Earlier, another fibre producer said it had reduced capacity utilisation to 50% due to a lack of product.

Opinion among sources was sharply divided as to how the market in March and April would develop.

On the one hand, some believed that the market had peaked, particularly in Asia, and some correction downward was inevitable due to the forthcoming holiday in that region.

On the other hand, other sources said that the Chinese Lunar New Year slowdown was a smokescreen, as it had been anticipated and there would still be a global shortage of ACN.

Still other sources pointed to a raft of ACN shutdowns scheduled in Asia in the second quarter, which would keep the supply side tight and underpin firm prices.

Moreover, sources said that there had been talk of the market overheating for the last three months, yet ACN prices had continued to rise.

In Europe, producers believed demand was being constrained by a lack of supply; and when INEOS’s ACN plant at Cologne came fully back on line, healthy demand would be met.

For many the key issue, in addition to how Chinese demand shaped up after the Lunar New Year holiday, was the prospects for feedstock costs going forward.

Producers were facing firm ammonia and propylene values that equated to raw material costs totalling $1,500-1,600/tonne.

With processing costs factored in, margins were thin, given current prices ex-plant that were equivalent to around $1,900/tonne, sources said.

($1 = €0.73)

For more on ACN visit ICIS chemical intelligence
Read Paul Hodges’ Chemicals and the Economy blog
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By: Mike Nash
+44 20 8652 3214

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