US acrylates market beset by supply issues

Painted into a corner

02 April 2010 00:22  [Source: ICB]

Pic credit: Newscom

The US acrylates market is constrained by ongoing operational woes. How will pent-up demand be satisfied?
AS THE second quarter (Q2) began, the US acrylates market remained mired in supply constraints and rising feedstock cost pressure. However, participants are largely optimistic about 2010 if operational issues that have plagued the market since December can be resolved in the short term.

Newscom

The timing of repairs, supply-chain balance and capacity restoration all remain unanswered for the time being. Demand has been recovering slowly from dismal levels in 2009, so although producers and many of their customers are not anticipating a particularly strong year for acrylates, they predict a better one than last year - if only by mid-range, single-digit percentages.

Acrylates demand from the coatings and adhesives markets continued to diminish in 2009, as the US struggled to emerge from the recession that hammered the construction and automotive coatings markets.

Although 2010 brought slowly improved buying interest, US new home construction fell by nearly 6% in February, the US Commerce Department announced in mid-March. That decline more than offset a 3% gain in January and signaled continued trouble for the crucial sector. The number of building permits issued in February for residential projects also declined.

In contrast, major market segments including superabsorbent polymers, accounting for about 30% of US glacial acrylic acid (GAA) consumption, as well as industrial and municipal water treatment chemicals, have enjoyed stable-to-robust demand, according to market sources.

In the meantime, major production issues have complicated a typically systematic supply rebuild, driving prices up on supply constraints and raw material cost pressure.

Even in an increasingly short market, customers had just begun to express concern in March about availability, as the slow rise in demand allowed buyers to obtain needed volumes, despite prevalent sales controls or allocations on GAA and many of the esters.

Despite some initially divergent views about the 2010 spring coatings season, optimism prevails. But production issues remain.

GAA SUPPLY BESET BY PROBLEMS
North American supply of GAA has been tightening since two December 2009 incidents in Texas. One occurred at Dow Chemical's Deer Park plant and another at American Acryl's acrylic acid plant in Pasadena - the latter a 50:50 joint venture between the North American production arm of France-based Arkema, Arkema Inc, and NA Industries. NA Industries is, in turn, a subsidiary of Japanese chemical company Nippon Shokubai. The disruptions at Dow and Arkema could last well into Q3 2010, some market sources say, as could existing sales control measures.

The third major US acrylates producer, Germany-based BASF, put GAA and its acrylate esters on 100% allocation in late December to ensure it could meet heightened demand after the Dow and Arkema outages.

March brought more bad news. Dow extended its force majeure on methyl acrylate (methyl-A) produced at Cangrejera, Mexico, after a problem with some equipment owned by Celanese, Dow's methyl-A toll manufacturer at the site. The force majeure was first implemented on June 30, 2009, after a feedstock propylene disruption at Mexican state energy company PEMEX. After a second unspecified mechanical failure at Deer Park in March, Dow declared force majeure on GAA, superseding existing sales controls.

The same month, Germany-based feedstock oxo-alcohols producer Oxea implemented sales controls on its n-butanol and other solvents,because of upstream tightness in North, Central and South America.

Also in March, esters importer Sasol placed its butyl acrylate (butyl-A) and ethyl acrylate (ethyl-A) production at Sasolburg, in South Africa, on 70% sales control for an estimated three months, following an unplanned outage at the site's feedstock acrylic plant.

After production issues, the other market-changing event was Arkema's $50m (€68m) purchase in January of Dow's former UCAR Monomers & Emulsions business and other Dow assets, including its acrylic acid and esters plant in Clear Lake, Texas, US.

Dow was required to divest assets following its 2009 acquisition of US specialty chemical producer Rohm and Haas, to comply with US antimonopoly regulations. The reviews have not been positive, as most buyers were not happy to see one less competitor.

"I don't view the acquisition by Arkema as a good thing for merchant market customers," one buyer says. "We have removed one more player from the market, BASF has significant captive demand as does Dow and Nippon Shokubai, and the American Acryl facility has typically been unreliable."

Another market observer echoed that sentiment, saying that the deal basically concentrated more than 90% of North American capacity into the hands of three major producers. One buyer offers a softer view, however, saying the acquisition gives Arkema more access to crude acrylic acid, which has been especially important to the producer and its customers during the current period of severely limited volumes.

PENT-UP DEMAND
After acrylate contract prices fell sharply in November 2009 on a steep drop in October feedstock propylene, prices began to move up the following month. Since December, GAA contract prices have risen by 17% on tight supply, rather than stronger demand, buyers say. March initiatives have settled at the low end of the 13-20 cent/lb range, with formula pricing and some negotiated prices settling even lower on February propylene increases.

April price increase initiatives are now in the 8-10 cent/lb range and have also begun to emerge on continued supply shortages, with rare spot GAA quoted by traders at $1.25/lb, but confirmed as high as $1.50/lb by other buyers and sellers.

While producers say the hikes are needed to restore margins and deal with rising raw material costs, some called supply-side efforts a margin grab but still defended producers.

"It's been a break-even business for a couple of years at best," a market observer says. "Actually, it's been a lousy business. The high price increase initiatives are just producers trying to gain margin while they can."

"It's been a break-even business for a couple of years at best"
Market observer

Another buyer warns that if prices continue to escalate amid ongoing operational problems, domestic buyers may begin to focus on obtaining product from overseas.

While European exports are ostensibly constrained as that market deals with tight supply and upstream operational issues of its own, China is a more likely short-term source of supply, although strong demand and tight supply continues there as well.

Some analysts warn a possible economic slowdown in China may temper growth in that country's demand for petrochemicals in 2010. The Chinese government also recently set a conservative GDP growth target of 8% this year, after 8.7% growth in 2009, with the intention of limiting consumer price hikes to an average 3% by curbing excessive lending.

"The time may come when North American producers will price themselves out of some of the market," a US buyer says. "We're already talking with China."

"Once the operational issues are behind us, the capacity available in China will ensure that the GAA and methyl-A markets, for instance, are well supplied," says another US buyer. The buyer also warns that if pricing remains elevated and supply tight, demand destruction could ensue. Some Chinese competitors in the water treatment market are already substituting an acrylamide process to produce anionic products for water treatment, rather than using GAA, a buyer says.

For now, however, there is pent-up demand for acrylates. Market sources expect costs to continue to rise during the first half of the year, limiting expansion and penetration as suppliers concentrate on production and supplying their contract customers.

Shortages in the US will also prompt more interest in imports as buyers seek price relief for themselves and downstream customers.

The busy season for coatings and adhesives has arrived, an acrylates producer notes. Until production issues are resolved, downstream slowdowns and work stoppages because of a lack of material or low inventories will wreak havoc on this market.

Larry Terry is a senior editor at ICIS pricing in Houston, Texas, US, with more than 25 years of journalism experience. His product portfolio includes methyl ethyl ketone (MEK), methyl isobutyl ketone (MIBK) and nylon.

By: Larry Terry
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