INSIGHT: Europe benzene pricing will be 'tense' throughout Q2

07 April 2010 11:54  [Source: ICIS news]

By Truong Mellor

LONDON (ICIS news)--Back at the beginning of March, numerous benzene players at the European Petrochemical Luncheon in Brussels believed the market would be characterised by the volatility that had plagued the sector since the beginning of the year.

But even they would have been shocked at how events unfolded over the rest of the month. The combination of temporary production issues and low inventory levels meant the market was prone to sharp fluctuations.

On 18 March, European spot prices spiked by more than $150/tonne (€111/tonne) in a thin market with bids but no firm offers. March was said to be dry, and two prompt deals for delivery in early April were heard at almost $100/tonne above where levels were pegged at the time.

A premium of almost $100/tonne for prompt April cargo over material with any later delivery date was noted, causing one supplier to quip that the only thing missing from the benzene market now was an assessed daily price.

Several traders expressed surprise at the sudden jump in values, in some cases to the point of exasperation. Other sources pointed out that the spike was caused by a handful of players liquidating their inventories in anticipation of slower demand owing to scheduled downstream shutdowns.

One downstream player added that many were expecting supply/demand dynamics in the benzene market to ease in light of a 7-8% reduction in styrene output over the course of 2009.

Indeed, despite some initial supply pressure, the styrene market seems to have become somewhat dislocated from the more volatile upstream developments in recent weeks.

While other downstream sectors such as polystyrene are currently buoyant, and the improving weather seems to be lifting sentiment for expandable polystyrene, many remain cautious as to how robust this demand will be as the year progresses.

But do the slings and arrows of unpredictable demand wholly explain the current volatility? There is certainly no shortage of theories as to what is keeping the benzene sector unstable at present. Some players cite the capricious nature of crude prices, while others saw low inventory targets and a continued lack of confidence in the market as the key drivers.

Then there is the ongoing issue of production problems and reduced output keeping the sector precarious. Over the past week, benzene values have continued to rise by almost $250/tonne, taking into account deals for prompt ad hoc material, suggesting that unplanned constraints on supply were keeping the market short.

One major European producer, speaking from the sidelines of the International Petrochemical Conference (IPC) in San Antonio, Texas, last week, felt that visibility on pricing would remain “tense” throughout the second quarter of 2010 due to supply issues, volatile crude numbers and even the fluctuating euro/dollar exchange rate.

But given the current uncertainty surrounding the wider petrochemical industry in Europe and how it will rise to meet the challenge of new capacities coming online in both Asia and the Middle East, it is perhaps little wonder that a product such as benzene is subject to such instability.

The industry is undergoing a sea change that will see emerging - or indeed fully emerged - economies such as China and India lead the global market of the future, and the initial prognosis of some industry observers for European players has been exceedingly sombre to date.

With these new plants wielding the advantage of both scale as well as cheaper feedstocks, there has been increased pressure on European players to start focusing on how to remain competitive on the global stage.

Yet there remains widespread reluctance to do so, or at the very least some indecision amongst many players as to how they may shift their operations towards a more profitable business model.

Until the future of the European chemicals industry is a little bit clearer, it seems that key products such as benzene will continue to operate in somewhat opaque circumstances.

($1 = €0.74)

For more on benzene visit ICIS chemical intelligence
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By: Truong Mellor
+44 208 652 3214

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