INSIGHT: US butadiene contract restructure takes hold

16 February 2011 16:03  [Source: ICIS news]

By William Lemos

HOUSTON (ICIS)--The US butadiene (BD) market began 2011 the same way it ended 2010: with rising prices and producers unable to reach a cohesive contract settlement, the latter being a factor that used to be the norm in the market.

Unlike the US ethylene or propylene markets, where haggling is par for the course, the US BD market had a strange but harmonious way to settle its contracts.

At the end of each month, the four main producers would announce their price initiatives for the following month, and the market would embrace the lowest proposed price, no questions asked.

But the camaraderie, which lasted for years and survived the worst of times in 2008, began to crack in September 2010, when a producer broke ranks and split the market for the first time in more than 10 years.

Prior to last September, BD had settled at different levels only in July 2000, when the market was split between settlements of 25 cents/lb ($551/tonne, €408/tonne) and 26 cents/lb.

A previous split settlement occurred in December 1994, when some contracts settled at 23 cents/lb and others at 24 cents/lb.

While September 2010 was an atypical month, because nominations were separated by a wide 6-cent/lb price gap, the disagreement proved to be more than a bump on the road.

Two other split settlements followed in December and January, as the same producer that split September again refused to match lower prices proposed by its rival suppliers.

February was no different, but this time the roles were reversed.

Market sources said the supplier that had previously split the market three times came out with the lowest nomination, which the three other producers decided to ignore.

BD in February rose by 5 cents/lb and 8 cents/lb from January after the three BD producers settled at 99 cents/lb, while the fourth supplier settled at 97 cents/lb.

The recent string of split settlements could point to a new era in the US BD contract process, whereby each supplier may begin to individually negotiate prices with its consumers.

“That would be a reasonable conclusion,” a settlement participant said.

Another source called the split settlements “strange”, but warned that this could be the new reality for BD, predicting that at least one US producer might continue to ignore the rest of the market.

The uptrend in the US BD market is also likely to continue, market sources said, pointing to firm demand, tight supply and higher spot prices since the turn of the year.

BD spot prices were assessed at $1.10-1.15/lb in the first week of February, rising on average by around 20% from 90-95 cents/lb four weeks earlier.

The surge in January was fuelled by higher BD prices in other regions, particularly Asia, which normally supplies the product to the net-short US market.

US BD demand is estimated at around 320m lb/month, but monthly domestic production runs at about 250m lb, forcing buyers to look for imports to close the 20% gap.

The constraint on US BD supply stems mostly from restricted crude C4 availability, because of the widespread use of ethane at US crackers.

Ethane, which yields almost no C4s, accounted for around 60% of the feedstock volumes used in the US in 2010 – a whopping figure compared with only 4% for crackers in Europe, an industry survey showed.

BD output in Europe in 2010, as measured versus a proportion of ethylene production, averaged 12%, or about twice the ratio for the US in the same period.

The outlook for BD in the US points to continued constraints on supply, as ethane is expected to remain a competitive feedstock and cracker reliance on it shows no signs of abating.

Market participants said another contract increase for BD was likely in March, provided that operating rates at downstream plants were not significantly affected by recent inclement weather in Texas.

Petrochemical production in Texas was reduced in early February, and in some cases halted altogether, after a cold front swept through the US Gulf, pushing temperatures below freezing.

At least two plants that use BD as a feedstock were affected, according to filings with state and federal regulators.

BD is not a big market, and even small disruptions can tilt the balance of the market, a source said, adding that the price direction for next month would only be clear at the end of February.

An increase in BD contract prices in March would be the fourth in as many months.

($1 = €0.74)

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By: William Lemos
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