INSIGHT: Acetone price falls plague phenol producer margins

04 August 2010 16:16  [Source: ICIS news]

By Julia Meehan

LONDON (ICIS)--Strong phenol demand continues to cause headaches for producers who have to find an outlet for by-product acetone. And customers in the phenol chain are increasingly worried about the pressure that acetone is putting on the suppliers of the product they want so much.

Acetone spot prices have dropped below €800/tonne in Europe in recent weeks from levels of €1,000/tonne, with reports that US material has been offered to the open market at as low as €650/tonne FD (free delivered) Rotterdam.

Some producers are even said to be considering reducing phenol production to help stem the glut of acetone. And that at a time of sharply rising phenol demand.

The situation has changed markedly in only a relatively short period. It is not so long since the European market was plagued by a series of planned and unplanned production problems.

At one point in the second quarter just about every European producer had a production issue. But since then acetone has been caught in a downward spiral, a victim of phenol’s success.

But while the value of acetone is often the bane of phenol producers' lives, surely a by-product that has some value should be cherished.

“Of course it is,” said one producer recently, who was also quick to compare the value of acetone to that of feedstock propylene.

“Acetone does not contribute to margins because there are so many costs. Occasionally it makes money and I guess there is some value down the line,” he added.

Comparing the recent cost of propylene with the value of spot acetone, he said: “Propylene is at €1,000/tonne, acetone is simply a loss making product at the moment.” The August propylene contract price settled at €940/tonne FD NWE, down by €38/tonne from July, but even at this level acetone spot prices remain undervalued.

But phenol demand remains strong, with many end-users in the phenolic chain unable to run fast and hard enough to supply customers and rebuild stocks from the second quarter.

Yet some industry players are concerned that producers will reduce phenol operations.

Just over a month ago, CEPSA Quimica announced that it had officially decommissioned line one of its three phenol/acetone lines in Huelva, Spain, in response to the economic downturn.

It is unlikely that the line will ever be brought back on stream.

With downstream phenol consumers, particularly those in the bisphenol A (BPA) market, so nervous about the prospect of another unexpected hiccup, "any mention of a problem tends to stir the market up into frenzy. People are still very nervous”, said a major producer.

Despite strong demand for BPA, phenolic resins, caprolactam and adipic acid, not only in Europe, but in Asia too, it appears that healthy margins for phenol producers are quickly being eroded by the glut of acetone.

Indeed, circulating in the market are rumours that one producer is considering cutting its phenol production in order to stem the flood of acetone in Europe.

This has not been confirmed, but a major producer said that it was shipping large quantities of acetone to Asia.

An active participant in the distribution sector believed that this was being done because storage tanks were full, but the producer said that the shipment was for one customer in particular.

The situation in the acetone market appears to be unique in relation to other by-products, which sell at a premium.

Propylene and butadiene, both by-products of stream cracking, used primarily to make ethylene, make healthy margins most of the time, although producers do have control over just how much of each, relative to ethylene, they produce.

Glycerine also delivers a healthy return for biodiesel producers, as does caustic soda, sometimes, for the makers of chlorine.

So why does acetone fail when other products are so successful? Some of it has to do with end-use demand - acetone finds its way into many different markets tied generally to the health of the economy, whereas phenol demand is more specific.

But most has to do with the formulas on which phenol and acetone prices are based.

Currently, phenol contracts in Europe are 100% based on rigid formulas related to the benzene contract, with the supply and demand dynamics of the market having no influence whatsoever on the outcome of the monthly phenol price.

Surely in a market which is currently so tight and where demand is booming, a €95/tonne drop in the benzene contract, which phenol then mirrors, makes little or no sense and goes against the grain of basic economics?

In the acetone market, however, supply and demand balances play a part in negotiations, but the contract price is also set at a formula loosely related to the propylene contract price.

So who are the winners and losers in these markets? When propylene increases and benzene falls, one might argue that it’s the phenol producers and buyers who reap the benefits, while the acetone contract buyers suffer because of propylene.

This is an ongoing saga for acetone, and until the phenol market moves away from such a rigid formula, it's one that won’t go away.

For more on phenol and acetone visit ICIS chemical intelligence
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By: Julia Meehan
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