INSIGHT: No traditional holidays for many chemical makers

10 December 2010 16:11  [Source: ICIS news]

By Mark Victory

LONDON (ICIS)--In most chemical-linked markets, as thoughts turn to the festive holiday season, shutdowns lasting two to three weeks are as traditional a December feature as carol singing.

Coupled with this, there is usually pronounced destocking of up to 50% as producers and end-users start to focus on reducing inventories to lower gearing ratios in end-of-year accounts.

However in Europe this year, things will be different, particularly in automotive and textile-linked applications.

In many chemical markets the December slowdown is expected to be less pronounced in 2010. These include: styrene butadiene rubber (SBR); polycarbonates (PC); acrylonitrile-butadiene styrene (ABS); recycled polyethylene terephthalate (R-PET); acrylate esters; plasticisers; toluene di-isocyanate (TDI); bisphenol A (BPA); polymethyl methacrylate (PMMA); maleic anhydride; the polyamide chain, and butadiene.

“There is no slowdown. Many plants are running through December,” an n-butanol seller said.

There are several key factors behind this. Chief among them is Asian buying interest. This is driving automotive and textile demand.

The Asian automotive industry has seen double-digit growth in 2010, because of strong GDP in China and social mobility fuelling car buying. In particular, this has stimulated purchases in large, chemical-intensive vehicles. Double-digit growth in the Asian automotive market is also expected in 2011.

“Usually December [European BPA demand] is 20% down on the yearly average. This year buying interest is 5-7% up,” a BPA trader said.

Moreover, chemical players across several markets suggest that many finished automotives are also being shipped to Asia from Europe, with anecdotal evidence indicating that more than 50% of German car manufacturers’ output is being exported out of Europe.

“Auto demand is strong [in December], premium brands are exporting to a lot... these vehicles carry a lot of ABS,” an ABS producer said.

It has been reported that BMW, for example, plans to shut down its Dingolfing and Leipzig production plants in Germany on Christmas Day only. Other car makers are believed to be following suit.

Players in auto-linked chemical markets such as SBR, which is used in tyre production, and nylon (or polyamide), used in engineering plastics for cars, believe that strong exports to Asia are behind this.

As a result, players in these markets are treating December as a normal month for production.

“Our plant won’t shut. Most will work through December because of strong demand,” a major tyre manufacturer - and SBR buyer - said.

In SBR, legislation in Germany at the end of November requiring cars and vans to be fitted with winter tyres during times affected by the likes of snow and ice was boosting buying interest, as locals sought to comply with the new regulations. Failure to do so would result in a €40 ($53) fine. 

“Producers are forced to produce more winter tyres as German car owners have to have them, otherwise they get a fine,” a German SBR buyer said.

Asian demand is also stimulating exports from Europe in textiles markets such as R-PET and the polyamide chain. This is because cotton shortages in the region - the result of floods in Pakistan and Taiwan earlier in the year - have caused a spike in synthetic textile substitutes.

Asian demand is not likely to fall until the approach of the Chinese New Year in February, supporting chemical trading throughout December and into January.

“Cotton is short, it’s driving exports to Asia,” an R-PET producer said.

In R-PET, demand is also being boosted by an increased focus on sustainability by large corporations.

Along with the influence of Asia, because Christmas and New Year celebrations fall on a weekend, there are a greater number of working days in December than usual. This also means that end-users are holding back stocks in order to have feedstocks for when production begins in the first week of January - on 3 January.

"Because Christmas and New Year are all on weekend days, there won’t be as many shutdowns,” a di-isononyl phthalate (DINP) seller said.

Early in 2010, markets such as SBR and PC had underestimated demand and destocking in December 2009 created severe shortages and price rises in the first quarter. As a result, players are more cautious this year.

With Brent crude prices breaching $90/bbl in the week beginning 6 December, there were fears that downstream chemical prices would rise sharply in January, and some players were seeking to pre-buy material ahead of any increases. This was already in evidence in the Asian and African caustic soda markets.

“Once crude hit $90/bbl, everyone started buying,” an Asian caustic soda exporter said.

In some cases, ensuring material for January is overriding working capital concerns - and no doubt causing some fraught discussions between accounting and manufacturing departments.

“The intention in the value chain is also to build stock,” said one acrylates producer, “so the question is, is it real demand... or are customers trying to prepare for a balanced-to-tight 2011?”

The final factor reducing the impact of end-of-year slowdowns is the impact of the economic recession of 2008 and 2009.

During the global downturn, inventories were reduced, and have been kept low in order to manage working capital. Lower stocks mean less of a need for inventory reduction in December.

“My thoughts are the whole chain... their stocks are low because the year was extremely low [in terms of stock levels],” a DINP producer said.

For this combination of reasons, at chemical plants in 2010, December 24 could be anything but a "silent night".

Additional reporting: Heidi Finch, Libby George, Jane Massingham, Julia Meehan, Helena Strathearn and Nel Weddle.

($1 = €0.75)

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By: Mark Victory
+44 208 652 3214

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