INSIGHT: Who is making megabucks in the phenolic chain?

12 April 2011 13:18  [Source: ICIS news]

By Julia Meehan

LONDON (ICIS)--Feedstock and production costs keep rising, demand for the majority of petrochemical-derived commodities is strong, and producers of phenol and its derivatives are struggling to keep up with demand, so why are producers and consumers in the phenolic chain accusing one another of making more money than them?

Some feedstock prices are above pre-crisis highs, despite crude still being some $20/bbl lower than when the markets crashed in 2008. However, price increases have been working their way down the phenolic chain and many intermediate markets have disconnected themselves from feedstock price movements altogether, particularly benzene.

Phenol derivatives, such as bisphenol A (BPA), caprolactam (capro), adipic acid (ADA) and phenolic resins, have outperformed original targets in recent months. Clearly there has been insufficient availability to feed demand in Europe and exports to Asia following various planned and unplanned outages for phenol and its derivative markets.

Major buyers will say they can secure their contract volumes but, owing to such strong demand, many contract buyers would like to purchase more material. However, this has proved difficult.

Volumes agreed as far back as the third quarter of 2010 have been insufficient and major buyers, particularly in the BPA and capro markets, would like to run their facilities harder but are unable to do so because of feedstock restraints.

This has supported sellers’ attempts to increase prices for non-formula-related contracts, when feedstock costs have fallen or rolled over from one month to the next.

Indeed, producers have been accused of holding customers to ransom by adopting a take-it-or-leave-it approach to volume. One major phenol producer was even quoted as saying it was a “take-it-or-take-it” choice, with buyers having to pay more for phenol despite the April benzene contract price falling by €141/tonne ($204/tonne).

With phenol contracts 100% linked to a benzene formula, with the only possibility of improving margin being the fee, also known as the adder over benzene (which is now being applied on a quarterly basis), falls in the benzene contract price and even rollovers have not benefited phenol producers or downstream customers linked to rigid pricing formulas.

Producers of BPA, capro, ADA and resins have managed to pass on increases when the benzene contract has rolled over. Even when it has fallen, there has been a hard push for increases for freely negotiated contracts and some buyers who are not fixed to formulas feel they are being penalised for this.

In the capro market, for example, non-integrated nylon 6 (or polyamide 6) producers are faced with higher prices but have the additional pressure of remaining competitive, since they are also in direct competition with many of their feedstock suppliers in downstream polyamides and engineering plastics.

A major capro buyer and nylon 6 and 6,6 producer said: “This is exactly what happened in the first quarter. Starting from January, we needed to pay large increases so we needed to react quickly, particularly for engineering plastics, because the unit margin is so small.”

The buyer added that three of its capro suppliers, all integrated, “did nothing on price” in the first quarter, while as a supplier of nylon 6 he needed to increase its price every month during the first quarter and by €100/tonne for March.

However, surely everyone is making money? One only needs to trail through recent financial announcements by some of the major producers and consumers of phenol/acetone commodities, such as BPA and methyl methacrylate (MMA), as well as nylon makers.

Demand for capro continues to outweigh supply. High levels of buying interest for flaked capro for export to Asia is one supporting factor and European capro producers have been talking about narrowing the price gap between the value of Asia capro and European capro for months now. However producers, most of which are integrated, are making healthy margins, as are non-integrated polyamide 6 producers.

DSM Fibre Intermediates, a major European capro producer and phenol consumer, swung into a fourth quarter net profit of €149m, from a loss of €60m in the same period a year earlier, as sales jumped 18% year on year. For the full year of 2010 the company, based in Sittard in the Netherlands, posted a 50.4% year-on-year increase in its net profit to €507m.

Chemicals sales for German giant BASF soared by 37% in the fourth quarter of 2010, on the back of higher prices and increased volumes.

Another polyamide integrated producer and capro supplier LANXESS, headquartered in Leverkusen, Germany, saw its fourth-quarter 2010 net income jump by 86% year on year to €26m. Sales in the fourth quarter climbed 32% year on year to €1.83bn, as all the firm’s business segments benefited from higher volumes, pricing and currency effects.

Paris-headquartered Rhodia, an integrated nylon 6,6 producer and capro consumer, posted a net profit of €91m in the fourth quarter of 2010, from €28m in the corresponding period in 2009, with sales rising 16% year on year.

Back at the top of the phenol chain, major phenol/acetone producers – Germany’s INEOSPhenol and Madrid-headquartered CEPSA Quimica – also posted significant profits at the end of 2010 and both plan to build phenol plants in China,

Although BPA is the main driver for phenol and the MMA market accounts for the highest percentage of acetone volumes, the lack of upward momentum in the value of by-product acetone remains a bane for phenol producers.

Nonetheless, major global MMA producers Lucite International and Evonik Industries have also posted positive financial gains, despite suffering in the economic downturn as MMA is firmly linked to changes in demand from the automotive and construction industries.

“It makes me angry when they say we are making money. There is good money to be made today but it’s childish to accuse your customers of earning more money than you,” one major acetone producer said, adding, “It’s hard on an economic cycle to make the right return on profit.”

While the rest of the market has slowly detached itself from sharp fluctuations in benzene prices, phenol producers and the phenol contract are almost entirely linked to benzene.

BPA demand has held up well in the first quarter, with a large proportion of it coming from China. China is leading the BPA market but Europe is also strong for polycarbonate and epoxy resins.

Regardless of who is making more money, at the end of the day we are all consumers. Whether you’re a producer, consumer, distributor or end-user, everybody is in the business of making money – and how much you make is determined on the dynamics of a market.

Isn’t it simply a good thing that everyone is still active in their respective markets and still in a position to voice frustrations in relation to costs and who is making the most margin?

Towards the end of 2008, industry players were putting their money on who would be the first to exit the market because margins were so poor. However, now the focus is on who is making the most money and who will be the next one to invest or acquire.

($1 = €0.69)

For more on the phenolic chain, visit ICIS chemical intelligence

By: Julia Meehan
+44 20 8652 3214

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