INSIGHT: US margins may shrink as demand falls, capacity rises

08 July 2010 20:30  [Source: ICIS news]

By Al Greenwood

HOUSTON (ICIS news)--US margins could shrink in the upcoming months, as new capacity comes on line, demand shrinks and plants restart.

Several plants had outages earlier this year that increased prices, said Gregg Goodnight, a consultant.

Other producers reduced capacity in response to the recession.

"Between outages and capacity that went down, there was enough unavailability and cost push to raise prices," Goodnight said.

Many of those plants have since restarted, pressuring prices downward, he said.

In addition to restarts, new capacity continues to come on line, he said.

Also, oil prices have also fallen, lowering costs for several downstream chemicals.

Falling prices created their own dynamic, he said.

"As people perceive that prices are going down, they will draw back on orders and wait for pricing to bottom out," Goodnight said. "I would say that there is a strong case for margins easing for the third quarter for most commodities."

At the same time, the US economy is showing signs of slowing down.

Already, the American Chemistry Council (ACC) lowered its outlook for the US economy in its most recent weekly report on the nation's chemical industry.

Earlier, the ACC had given the US economy its highest score since August 2009.

“The expected slowdown in the second half of the year is now upon us,” the ACC wrote in its weekly report. Statistics now point to a moderating recovery.

An index measuring consumer confidence fell 9.8 points to 52.9, while the nation's unemployment rate fell slightly to 9.5% in June – mostly because people gave up looking for work.

Recent statistics for construction – a crucial chemical end market – were dismal. New home sales fell 32.7% in May.

An index measuring large future construction projects fell by 5% in May, breaking a three-month streak of consecutive gains.

June automobile sales rose year over year, but they still fell from May, the ACC said.

Chlorine production illustrates the weaker US demand, said Roger Shamel, president of Consulting Resources. Chlorine production reached 4.8m tons (4.4m tonnes) during the first five months of the year.

"That looks good from last year, when we were at 4m tonnes," he said.

But chlorine production has been much higher during the same five months for several years, he said. In 2000, production reached 6.1m tons.

"We've had basically two years back to back of record low demand," Shamel said.

"Hopefully, things will get better in the general economy, but I don't see much improvement in the commodities I follow until next year," he said.

Among other chemicals, US ethylene contracts for June fell 5.25 cents/lb ($116/tonne, €92/tonne) to settle at 39.50 cents/lb - the third consecutive monthly decline. Altogether, ethylene prices fell by 16 cents/lb during those three months.

US expandable polystyrene (EPS) prices for July fell 3 cents/lb, reflecting a weak construction market. Prices for polyethylene (PE) and polypropylene (PP) both fell.

Nonetheless, some prices did rise - but many of those hikes were the result of outages and shortages in feedstock.

Following outages, US contract prices for methyl methacrylate (MMA) increased to more than $1/lb mid-year, up by 18% from 87 cents/lb in January.

US butadiene (BD) continued to rise – but mostly due to tight supply of crude C4 instead of rising demand. In fact, some producers of end-market styrene butadiene rubber (SBR) warned they would lose margins or even cut production because demand remained so weak.

A few products did break the trend.

US prices for acrylonitrile butadiene styrene (ABS) and polycarbonate (PC) remained resilient because of automobile demand earlier in the year.

Both products also benefited from demand in consumer electronics. The Semiconductor Industry Association (SIA) reported that May semiconductor sales for the world rose 4.5% from April and 47.6% year over year.

Unless the recovery picks up in the US economy, future price increases will likely be justified on outages– a trend that helped buoy US ethylene prices earlier in the year.

Looking forward, more hurricanes could disrupt production along the Gulf of Mexico. The first hurricane in the Atlantic basin already hit the Gulf coast, and forecasters predict up to 13 more could form during the season.

($1 = €0.79)

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By: Al Greenwood
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