24 May 2011 19:18 [Source: ICIS news]
By Gene Lockard
HOUSTON (ICIS)--With the US summer driving season close at hand and new vehicle sales showing signs of a mild-to-moderate rebound, the domestic styrene butadiene rubber (SBR) sector would seem to be poised for growth. Trouble is, rising gasoline prices, a slowing economy and high production costs have producers questioning whether the good times are here or not.
After an economically driven slowdown for SBR that began late in 2008, demand was finally on the upswing. After increasing 7-8% in 2010 over 2009 levels, SBR demand is expected to grow another 3% in 2011, according to industry analysts. Producers say they can ill afford to lose any of it.
However, within the past few weeks, rising gasoline costs have become a chief concern of those with SBR supplies.
“There has to be some worry right now. We're seeing gasoline at $4/gal, even after crude oil prices began to ease, and diesel prices are even higher,” a producer said.
Rising fuel costs are nothing new when the US summer driving season – the period between the Memorial Day holiday at the end of May and the Labor Day holiday in early September – draws near. However, when fuel costs rocket past the mid-$3s/gal and approach, or exceed, the $4/gal mark, as they are now, motorists' behaviour changes.
The effects of high fuel costs on motorists have been quite noticeable over the past few years, when energy costs have set new record highs, and they are becoming noticeable now.
“Already, we're seeing a drop in gasoline demand, so there’s already a change in behaviour, and it's not officially summer yet. Fuel prices could go even higher in the weeks ahead,” an SBR supplier said.
For gasoline consumption to fall, motorists have to drive fewer miles, which in turn slows tyre wear.
Higher fuel costs also mean that some motorists who are feeling the pinch in their pocketbooks could delay purchasing new tyres when the old ones wear out. Replacement tyres are the largest driver of demand for the SBR market.
The continued stagnation of the US economy is another concern for those with SBR supplies, since any hiccup in the already-weak economy would instantly translate into a drop in new vehicle sales.
The original equipment manufacturer (OEM) tyre market that supplies tyres to new vehicle producers is second only to the replacement tyre sector as a driver of demand for SBR.
Recently, that driver has been providing some real buying interest for SBR. Vehicle sales in the US increased in February by 27% over the same figures last February. That sales surge was followed by year-on-year sales increases in March and April of about 17–18%, according to Autodata.
However, there are signs that the economy is still underperforming, an SBR trader noted.
“The housing market is still contracting, and a lot of people are finding out that they are upside-down on their loans. That means they feel poorer, and will be less likely to go out and buy new cars and trucks,” the trader said.
With SBR demand in a precarious position, SBR suppliers have yet another worry – the recent rise in production costs from higher feedstock prices. That has prompted them to raise prices to restore and maintain margins.
During periods of strong demand, such a move usually produces little more than grumbling from buyers. When demand is limited, however, any surge in prices could scare buyers off altogether.
So far, that has not happened, but sellers are worried.
“We’re seeing no drop in buying interest so far, but we don’t know how much more we can raise prices before we begin to see demand erosion,” an SBR producer said.
Producers are keeping a nervous eye on buyer pushback after raising prices about 30 cents/lb ($661/tonne, or €469/tonne)since March. The price hikes were said to be necessary to maintain margins following a strong run-up in feedstock butadiene (BD) costs and a spike in natural rubber prices earlier in the year.
Monthly contract prices for 1502 non-oil grade SBR moved up 5.5 cents/lb in March to $1.24–1.31/lb. That increase was followed by hikes of 15–16 cents/lb in April and another 15 cent/lb increase in May, taking 1502 contract values to $1.55–1.61/lb.
SBR spot prices have been even more volatile, with 1502 numbers rocketing up to $2.25–2.35/lb early in May, which are well above early-April prices of $1.50–1.60/lb. Even spot 1712 oil extended-grade material reached as high as $2.05/lb.
While natural rubber prices have slid in recent weeks to about $2/lb, down from first-quarter highs near $2.60/lb, the rise in BD prices has been accelerating. More ominous for SBR producers is the fact that there is little on the horizon to suggest a slowdown in BD strength in the coming weeks.
“All the variables that sent BD prices up strongly in the first place, including tight supply and snug crude C4, are unlikely to change before at least the third quarter. The market may have to get used to higher prices for awhile,” a BD producer said.
The May BD contract gained 20–22 cents/lb following a split settlement – the sixth in nine months – to hit $1.41–1.45/lb. The April settlement gains of 17–19 cents/lb were nearly as strong.
While not quite as upwardly mobile as SBR spot prices, the BD spot market still increased significantly to reach about $2/lb for some early-May deals, with more typical spot prices heard at $1.85–1.95/lb.
Two BD producers remain on sales controls, one at 90% and the other at 60%, and the producer at 60% is expected to continue its sales controls into June as it works toward completion of a maintenance turnaround that is already underway.
The limits on extraction capacity just as summer arrives means that BD prices are likely to remain at lofty levels, putting the squeeze on SBR producers, who could be facing a long summer of cooling demand.
($1 = €0.71)
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