22 December 2010 17:30 [Source: ICIS news]
By Gene Lockard
HOUSTON (ICIS)--While it may be hyperbole to suggest that the US styrene butadiene rubber (SBR) market has risen Phoenix-like from the ashes, it is undoubtedly flying high when compared with end-year 2009 strength. More importantly for producers, there is little to suggest that the SBR market will descend to 2009 levels anytime soon.
This bullish outlook for sellers is a marked change from the second quarter of 2010, when the possibility of a sequel to the recent economic recession loomed large.
Although chemical demand takes a hit when the economy sours, SBR demand over the past two-plus years has been particularly hard-hit.
Most SBR is used to make tyres, and a sizeable percentage of those tyres are original equipment manufacturer (OEM) truck and auto tyres.
Because a sluggish economy is guaranteed to cap new vehicle sales, economic downturns - including the current one - extract a significant toll in tyre and SBR demand.
Throughout 2009, SBR demand languished well behind previous years amid lacklustre vehicle sales. During 2010, however, the rate of year-on-year demand growth increased significantly, particularly in the second half.
Through the first 10 months of the year, the increase in the OEM tyre market was about 40% over 2009 figures, while replacement tyre demand - perhaps the largest single demand driver for the SBR market - increased nearly 4.5% year-on-year.
SBR sources expect the overall rise in demand to continue in 2011, with an analyst predicting an average growth of about 2.5-3.0% annually. However, the analyst put the brakes on any possibility of a return to the peak demand levels seen in 2006.
“We aren’t going to have the demand levels that we had just three or four years ago, and I doubt if we will get to that level again. As can be seen by gasoline demand figures over the past four years, drivers are limiting auto trips following the run-up in gasoline prices a few years ago,” the analyst said, adding that the reduction in vehicular trips is now seen as permanent.
With a decline in auto travel part of the new normal, SBR demand for replacement and OEM tyres in 2011 are likely to remain below historical highs...but up from 2010 figures, the analyst said.
That will help SBR producers that raise prices to offset higher production costs. For much of 2009 and 2010, SBR producers were caught between weaker-than-normal demand from tyre producers and rising production costs from higher feedstock costs, particularly butadiene (BD).
Because of limited crude C4 production, BD supply was very tight in 2010, and there is little to suggest 2011 will be any different. Since BD is the main feedstock for SBR, SBR producers must try to raise prices in a rising BD market or suffer declining margins.
In July and August 2010, BD prices rose to a yearly settlement high of 94 cents/lb before waning in the fourth quarter to settle in a split settlement of 86-87 cents/lb in December. By comparison, the December 2009 BD settlement was 65 cents/lb.
While an improvement in demand over 2010 is expected for the US SBR sector, the upcoming year is still expected to be challenging. Producers will likely have to raise prices to meet rising production costs from BD, and from record or near-record high natural rubber prices following weather events that limited new material.
The volatility in the BD market was a problem for SBR producers, since raising values during times of low demand can be tricky, an SBR producer said. Customers can easily be chased off if prices run too far in front of demand, the producer explained.
“There’s a thin line to walk, with declining margins for producers on one side, and a reduced customer base on the other,” the producer said, adding that sometimes, it’s better to allow margins to slightly narrow, at least until demand begins to return.Read Paul Hodges’ Chemicals & the Economy blog
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