25 October 2010 00:00 [Source: ICB]
Demand will return after a seasonal lull in the epoxy market as economies improve
Demand for epichlorohydrin (ECH) could soften through the fourth quarter, but the longer-term outlook suggests strong prices amid snug supply as improving economic conditions pressure the supply chain.
ECH is consumed primarily in the production of epoxy resins, which are used in high-performance coatings, laminates, adhesives, flooring, paving and composites. Major end-markets are the automotive, construction and aerospace industries.
In the US, Western Europe and Japan, consumption of epoxy resins plummeted during the 2009 recession. In Japan alone, it fell by 35% between 2007 and 2009, according to a recent report by SRI Consulting, a US-based business research firm.
The market began to recover in 2010, however, and SRIC expects consumption in 2009-2014 to grow at an average annual rate of 3.2% in the US and 2.8% in Western Europe. Consumption in Japan is expected to grow at an average annual rate of 6% over the same period.
In China, India and some other Asian countries, the market for epoxy resins never ceased growing, and it will continue to expand. In China, consumption will grow at an average rate of 7%/year during 2009-2014, according to SRIC; in the Republic of Korea, at around 6%; and in Taiwan, at 8%.
Over the past two years, the market for feedstock ECH has gone through the same ups and downs. Looking forward, SRIC expects consumption to grow at an average rate of about 3.5%/year during 2009-2014. In Asia and the Middle East, the rate will be 7.5-8%/year. Globally, it will be slightly more than 6%.
In early October, sources in Europe reported a dramatic rebound in the ECH market of 40% for 2010, and they anticipated similar growth next year.
A BRIEF RESPITE
In the short term, however, demand for ECH could slip as epoxy production responds to the seasonal lull downstream in coatings.
ECH prices in Europe have flattened of late in apparent anticipation. From July 2009 until August, European ECH contracts had climbed or held steady as epoxy resin shot up (see graph opposite). For October, however, ICIS assessed contracts at a rollover from September's €1,750-1,800/tonne ($2,446-2,516/tonne) FD (free delivered) NWE (Northwest Europe) (BULK), values slightly lower than the August peak of €1750-1,850/tonne.
Buyers seeking a decrease pointed to weakened feedstock propylene prices and faltering epoxy resin demand, but manufacturers countered with limited availability because of feedstock shortages and ongoing maintenance shutdowns.
Czech producer Spolchemie shut down its 24,000 tonne ECH unit at Usti nad Labem for a week in early October. In September, US producer Dow Chemical idled a 100,000 tonne/year ECH unit in Freeport, Texas, for the rest of the year, reducing availability for export.
In Asia, ECH prices have been more variable. On the whole, the spot market has risen, but there have been two periods when prices slipped by almost 10%. With the downstream lull approaching, another slide may be in the offing.
Spot prices already exceed their prerecession high of $2,020-2,080/tonne CFR China Main Port (CMP), assessed in July 2008. Additionally, local producers have been unable to get increases from buyers already concerned with the price of the co-feedstock bisphenol A (BPA), which has risen by more than 25% since August. Some producers of liquid epoxy resin (LER) have responded by cutting operating rates back to 70-80%, with possible additional cuts of 10-20%.
For the week ended October 12, ICIS assessed ECH spot prices in Asia at $2,180-2,250/tonne CFR CMP, where they have remained since the week ending September 28.
The US market for ECH is relatively small, with most production consumed captively. ECH sold on the US spot market was pegged at about $1.08/lb ($2,381/tonne, €1,705/tonne), down by 8 cents/lb from its yearly high, the week of October 12.
According to SRIC, Dow, which has plants in Europe and the US, is the largest global producer of ECH. US-based Hexion, which also has plants in the US and Europe, and China-based Shandong Haili are also major players in ECH.
As demand picks up in the new year, producers may find themselves arguing for increases on the basis of chlorine costs. Limited availability of the feedstock could make the global ECH market "uncomfortably balanced," a source at Dow told ICIS.
"Chlorine will be a bigger issue next year. PVC [polyvinyl chloride] is coming back in a big way, which could take chlorine away from the ECH market," he explained. Whether or not that occurred would depend on which derivative offered the best returns. "If there is a bubble in the market, we may struggle to fill it," the source stated.
Global supply and demand balances would be driven by operating rates in China, which, if 100%, would create a long market, said the Dow source.
Rising chlorine prices might provide an economic advantage to ECH produced from glycerin, which consumes half the chlorine of the traditional propylene-based route. Dow, Belgium-based Solvay, and others have developed such processes to take advantage of cheap glycerin obtained as a by-product of biodiesel production.
Other advantages of the glycerin-to-epichlorohydrin (GTE) processes include the switch from elemental chlorine to hydrogen chloride, the production of less waste water, and lower levels of chlorinated organic by-products.
Thailand-based Vinythai is building a 100,000 tonne GTE project that will use Solvay technology at Mab Ta Phut.
Dow is building a 150,000 tonne/year GTE facility in Shanghai, China, that is expected to come on stream in 2011.
Includes reporting by Amandeep Parmar in London, Becky Zhang and Liu Xin in Singapore and David Barry in Houston
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