INSIGHT: VAM tighter in Europe as demand creeps up

07 July 2010 16:50  [Source: ICIS news]

By Jane Massingham

LONDON (ICIS news)--An essential intermediate in the production of so many widely used industrial and consumer goods, vinyl acetate monomer (VAM) has proved something of a bellwether for the European chemical industry in the first six months of 2010.

Demand has improved, but has struggled to gain much ground alongside the stumbling European economies.

EU economic growth so far this year has been far from spectacular: the EU posted GDP growth of just 0.2% in the first quarter of the year, according to data released on Wednesday by Eurostat.

Growth in the second quarter could have been higher - comments from some industrialists and others at least suggest that it might be. However, levels of output across most manufacturing industries are still subdued.

But more and more buyers and sellers of VAM in Europe are confirming that demand in the first half of 2010 has matched that seen in 2008 - the segment has lost only 18 to 24 months of growth. 

And it is encouraging that many are still cautiously optimistic about what lies ahead.

VAM’s widespread use in the economy has something to do with that. The chemical is a key intermediate in the production of polyvinyl acetate (PVA), which in turn is used to produce paints, adhesives and coatings, and to make polyvinyl alcohol (PVOH) to produce adhesives, coatings and packaging films.

Some estimate that approximately 80% of global VAM production is used to make those two chemicals, with most of the remaining volume going to polyvinyl butyral (PVB), ethylene-vinyl acetate (EVA) copolymers and ethylene vinyl alcohol (EVOH) resins.

Undoubtedly, the sharp downturn in the construction industry, which began at the start of 2008, hit VAM demand hard. But the breadth of use of the chemical has lessened the recessionary impact - and possibly diluted the return to growth.

Fundamentally, the VAM market is long globally with operating rates still reduced.

Throughout the downturn and the recent recovery, producers have been keen to keep a lid on working capital and have managed output very closely to match demand.

That process has seen recent production issues in Europe and reduced imported volumes pushing spot prices markedly higher to €890/tonne ($1,127/tonne) FD (free delivered) NWE (northwest Europe), a level not seen in Europe since October 2008.

Quarterly contract prices also rose, from €660-750/tonne FD NWE in the fourth quarter of 2009 to €730-800/tonne FD NWE in the second quarter of 2010, and further moves are afoot to increase again in the third quarter. Producers have targeted rises of €100-150/tonne.

VAM Europe: contract vs spot prices

The tightness in spot supplies is reflected in the fact that spot numbers have risen beyond contract prices for the first time in many years.

However, so much VAM business is covered by quarterly contract business that the proportion of spot activity is small.

While there are improvements in demand, the spike in spot numbers has largely been attributed to the force majeure declaration from INEOS’s 300,000 tonne/year unit in Hull, UK, on 27 May.

The major suppliers of VAM in Europe are INEOS, Dow Chemical, LyondellBasell, Celanese and Sipchem.

Producers have talked a tight market, and while many agreed that this was the case for spot business, most VAM customers are covered by contracts.

“I don’t see it as tight - I think it is an opportunistic reaction in terms of the producer – we are fully covered with no problems from spot and contract,” one buyer said.

A major consumer added: “We always keep a small percentage of our demand to source from the spot market and we have had no problems.”

Most producers said business had been turned away as they were unable to cover the level of enquiries seen.

“We still get a lot of requests [for VAM] and I think there are a few more supply issues than customers realise,” a producer said.

A customer commented: “I am not concerned......they [producers] are making the most of this and I think it is a knee-jerk reaction.”

While tightness may have affected spot prices over the past month by €100/tonne, it remained to be seen if the same magnitude of a movement can be mirrored in the upcoming third-quarter price negotiations.

Higher prices seem to be driven more by production issues than by improved demand.

The petrochemical industry has done well in trying to manage supply versus demand and meet customer expectations during the unprecedented economic situation seen over the past two years.

Even when unexpected issues occur, the fact that customers and producers now say that the first half of 2010 is showing similar off-take to that seen in 2008 is surely a step in the right direction.

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By: Jane Massingham
+44 20 8652 3214

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