OUTLOOK '11: Europe aromatics look strong on healthy demand

27 December 2010 13:30  [Source: ICIS news]

By Truong Mellor and Julia Meehan

LONDON (ICIS)--The forecast for European aromatics is largely optimistic following a volatile year marked by erratic price movements, instability on crude values and strikes in France.

“January is looking firm on both benzene and styrene,” said one trader. “It appears to be driven by demand and not crude.”

Delegates at the 9th European Aromatics & Derivatives Conference in Berlin last month, while acknowledging some of the challenges that Europe was likely to face, remained upbeat about the aromatics complex.

Strong demand from the styrenics chain was the focus of some for 2011, with players noting that the substitution of polypropylene for polystyrene had come to a head. Others were optimistic about some of the smaller downstream sectors, like expandable polystyrene, for avenues of future growth.

With reformers expected to run at lower rates next year due to weakening demand for gasoline, many expected benzene availability to remain precarious in 2011.

Additionally, the US was expected to remain structurally short on aromatics, which could pull significant volumes in from Europe.

“The US will remain a sourcing market next year,” said one styrene trader. “Certainly if ethylene prices stay high. Combined with turnarounds in the first quarter, this will limit any imports from North America into the ARA [Amsterdam Rotterdam Antwerp] region.”

Some were predicting that imports into Europe, predominantly from new Asian capacities, would actually leave the styrene market longer next year. However, the majority of players expected Asian demand to stay firm, particularly in the Chinese market.

“Demand will stay strong, and we could see some arbitrage opportunities for European players open up in 2011,” said one trader.

While it was still too early to gauge the impact of new operations, such as Styron and Styrolution, on the market, several players were expecting spot activity to pick up in 2011. With fewer integrated players, Europe may emerge as more of a free market environment.

“The status quo will continue to an extent, because it is difficult for these new bodies to completely remove themselves from their parent companies,” said one source. “However, we might see some more entrepreneurial behaviour.”

This will prove crucial for styrene players in a market that will be increasingly tough, and further consolidation plans may emerge in 2011. Despite the current bullishness, there were still some observers that continued to exercise caution.

“We have seen a hike in crude prices in 2010 despite supply/demand fundamentals,” said one consultant. “There are record stocks in the US, but people are ignoring this and taking a punt on exchange rates.”

There was also some concern that continued high pricing on crude and energy would begin to eat into discretionary consumer spending, which would in turn have a depressing effect on key end-use markets.

One source felt that the market now risked moving into “demand destruction” territory, adding that strong and sustainable downstream demand was unlikely.

January has traditionally been a strong month as players seek to replenish inventories following the holiday period when stocks are run down. Despite talk of a bullish opening to the year, recent indications regarding the automotive, packaging and housing industries in Europe have been far from encouraging.

However, there was some optimism that underperforming domestic sectors could be counterbalanced by strong export demand in 2011. Sources noted that markets such as Asia and eastern Europe could perform well for styrene derivatives. One trader commented that Turkey, in particular, could prove buoyant.

With volumes from the US scarce and ethylene prices high, buyers from South America may also increasingly look towards Europe for styrene next year.

Toluene was predicted to remain balanced, with no major structural changes on the horizon. Demand from emerging chemical markets such as India and the Middle East could pull domestic volumes, which could potentially offset a stagnant housing market in Europe.

In the paraxylene (PX) market, downstream demand for purified terephthalic acid (PTA) and polyethylene terephthalate (PET) was  expected to remain strong in 2011. Buyers of PX were unconcerned about feedstock availability.

“There will be enough PX in the market. Producers will simply run in order to meet our demand. There are only a few PX buyers left so availability should not be a problem,” a major buyer said.

However, in the orthoxylene (OX) market, a major buyer and producer of phthalic anhydride did sound concerned about availability. This was partly attributed to strategic decisions upstream, with questions over whether refineries would continue to see value in producing OX.

“The availability of raw materials [in 2011] is a big question mark. Are refineries willing to produce OX?” a producer said. This was also partly attributed to OX producers wanting to increase captive use of the material.

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By: Truong Mellor
+44 208 652 3214

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