INSIGHT: Seasonality effect diminishing in Europe EPS

13 April 2011 18:04  [Source: ICIS news]

By Peter Gerrard

Harsh winter would affect feedstock suppliesLONDON (ICIS)--Expandable polystyrene (EPS) is a growing market with up to 75% of total consumption in Europe accounted for by sales of block grade material destined for the insulation sector.

While packaging, the other important application for EPS, remains significant for manufacturers, it is the large expansion in insulation markets that has been the key to the growth.

The primacy of insulation, compared with packaging, has been driven by the ever greater prominence of energy conservation.

Encouraged by state intervention, especially government incentive schemes during the 2008-09 recession, the industry has enjoyed an almost uninterrupted growth in sales of block.

This has occurred at a time when packaging volumes have stagnated owing to the transfer of substantial manufacturing capacity for consumer durables such as electrical and white goods away from their traditional bases in western Europe.

The processors who convert block EPS into insulation boards are part of the construction industry and their levels of activity, therefore, largely depend on the marked seasonality that characterises that sector.

Typically, the spring and summer months are the peak season, with good volumes of EPS consumption often lasting into November, when an abrupt slowdown happens after the first severe frost or snowfall.

As outside work is often halted for many weeks, especially in the Nordic region, the EPS industry experiences a similar quiet period.

Additionally, the resin employed as a bonding agent for insulation panels fails to function in temperatures much below zero, placing further constraint upon activity among converters.

Yet industry players say that, in terms of production planning, EPS is now less subject to the rigours of seasonality than in years gone by. 

Suppliers say that they have improved their inventory management, with the consequence that they no longer carry large stocks into and through the winter months.

Converters also are said to have improved their position.

A trader comments: “In the last ten to fifteen years, they have learned to manage better their stocks. Maybe there is better market intelligence or market awareness”.

Although players say that the ebb and flow of EPS output is not in itself a significant problem, the question of price is an issue for sellers and buyers.

This is not perhaps evident from the “face value” of the monthly EPS price.

Looking back over the past two and a half years, the only time when ICIS assessed values have really corresponded with the expected movement in seasonal demand was in the winter of 2008-09.

However, the industry seems to speak with one voice in saying that the principal driver for EPS prices is the monthly movement in its raw material, styrene monomer. As one major producer notes: “Prices aren’t determined only by seasonality, but [mainly] by styrene movement.”

The most used benchmark index for styrene in the EPS industry is the barge contracts that are agreed at the beginning of each month. These take no account of the fluctuations in the markets downstream of EPS and can therefore move in the opposite direction to the pattern of demand for block EPS.

Thus, in the opening quarters of the last two years, an untypically hard and long winter has been accompanied by a steep rise in monomer price. On both occasions, the EPS number also has risen, defying the normal commercial logic of supply and demand.

Industry sources say, though, that the seasonal effect on demand does have an impact on their margins.

While feedstock costs and hence EPS prices may well rise in winter (and fall in the summer, as happened in July and August last year), the spread between styrene and EPS changes according to the time of year.

“The season of the year affects the producers’ margins. The spread comes under pressure in the winter,” a Nordic producer observes.

One producer emphasises however that “every year is slightly different”. In particular, the last three winters appear to have presented features that have made them unrepresentative.

Another supplier stresses that what brought about the squeeze in margins in the 2008-09 winter was not so much seasonality as the collapse in consumption (for both construction and packaging industries) and the attendant slump in petrochemical prices, including benzene and styrene.

In the past two winters, margins have taken a hit because monomer numbers have risen at the same time that construction activity has been especially affected by cold weather. “We all know there is going to be a winter, but how harsh it will be is another matter,” a supplier comments.

Industry sources are upbeat about the prospects for EPS consumption in 2011 and their latest reports tell of a good pick-up in demand already apparent in April.

The implications for pricing are not lost on the suppliers. 

Reductions in styrene price ranging from €80-95/tonne ($116-138/tonne) are not expected to result in commensurate drops in the EPS price.

Although there is not yet a clear consensus on specific numbers, producers expect that they will retain most of the monomer cut.

One says: “A [price] drop is unavoidable [but] the aim of the producers is clear - to restore some margin, if not all.”

($1 = €0.69)

For more on polystyrene visit ICIS chemical intelligence

By: Peter Gerrard
+44 208 652 3214

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