INSIGHT: US SBR producers worried by demand uncertainty

23 August 2011 18:39  [Source: ICIS news]

US SBR producers worry that demand will flattenBy Gene Lockard

HOUSTON (ICIS)--It is the unknown – an uncertainty about the future – that causes chemical producers the greatest worry when considering demand.

With obstacles such as rising prices, the approaching end of the the US summer vacation season and a weak domestic economy littering the road ahead, US styrene butadiene rubber (SBR) producers worry that their market could soon slow to a crawl.

Most SBR is used to make vehicle tyres. Vehicle tyres fall into one of two categories, the replacement tyre category or the original equipment manufacturer (OEM) tyre sector that provides tyres for new vehicles.

For most of the year, SBR demand levels have been running ahead of those seen over the past two years on a general rise in tyre sales. However, SBR producers worry that a combination of factors could translate to waning SBR demand in the coming months.

Perhaps their chief concern is the question of how high SBR prices can go before demand begins to erode. But is this even a legitimate worry for producers?

The answer to the first question is the big unknown that so worries producers. There is simply no way to know exactly at what price point SBR demand will being to fade as consumers back away from rising tyre prices, which are the eventual result of higher SBR prices, a producer said.

“At some point, overall demand will weaken. We’ve already seen some evidence of demand erosion in replacement tyres, but an increase in new vehicle sales kept the OEM market strong enough to make up much of the difference,” the producer said.  

A trader noted that replacement tyre demand was down, too.

“For a few months, life was good for SBR producers. Buyers were panicky, trying to get product, and they paid the increases. But now, replacement tyre demand is soft, and margins could get squeezed,” the trader said.

So, the answer to the second question is a most emphatic “yes”- this is indeed a legitimate worry. In fact, having to raise SBR prices to cover increases in feedstock prices has replaced high gasoline prices earlier in the year as perhaps the biggest demand-related concern for SBR producers.

To be sure, US SBR prices have been on an upward path throughout 201l.

August 1502 non-oil grade contract prices were 183-190 cents/lb FOB (free on board) USG (US Gulf), while 1712 oil extended grade material for August was priced at 161-169 cents/lb FOB USG.

By comparison, the January contract ranges were 113-121 cents/lb FOB USG for 1502-material, and 103-111 cents/lb FOB USG for 1712-grade material.

SBR spot prices ran up even harder, driven by limited supply and steady demand. August values for 1502 and 1712 are 200.00-215.00 cents/lb FOB USG and 185.00-195.00 cents/lb FOB USG, respectively. That is well above January spot prices that were generally 118-124 cents/lb FOB USG for 1502-grade and 107-112 cents/lb FOB USG for 1712-grade.

If high prices worry SBR producers, then why do they keep raising them?

Producers say that when faced with rising production costs in the form of higher feedstock butadiene (BD) values, they had to choose between accepting a margin squeeze or raising prices just enough to keep margins stable.

It is clear that a run-up in feedstock BD values has been the driving force in SBR prices for some time now, and that dynamic shows little promise of changing anytime soon.

Driven by tight supply because of a lack of crude C4 and production issues, BD has roared to record high after record high. Three BD producers settled August at 175 cents/lb FOB USG, while the fourth settled at 186 cents/lb FOB USG.

By comparison, excepting for August, September and October 2008, when BD settled at 110 cents/lb, 118 cents/lb and 122 cents/lb, respectively, BD settlements were never in the three-figure range until March 2011, when they settled at 104 cents/lb.

SBR producer demand worries extend past feedstock-driven price hikes, however. When fuel prices began rising in the second quarter – only weeks before the US Memorial Day holiday weekend and the beginning of the summer vacation season – conservation-minded motorists cut back on their vehicle trips.

Fewer vehicle trips translated into reduced wear and tear on vehicle tyres moving into the summer, thus slowing replacement tyre sales.

Northcoast Research Holdings LLC managing director Saul Ludwig said that tyre shipments were down by 12% in May, following a 2% decline in April.

This reduction was attributed to a drop in vehicle trips which, if it continues, could result in flat sales in 2011, compared with 2010. Originally, Northcoast predicted an increase in tyre shipments of 3% in 2011.

“That shows how sensitive and responsive demand is to fluctuations in the overall economy,” an SBR trader said.

While the replacement tyre market has underperformed, the OEM market is expected to increase about 5% over 2010 figures, thanks to an increase in new car sales. But how long sales will be up is anyone’s guess.

“A short dip in vehicle sales wouldn’t do much. However, worried customers are not as likely to go on a spending spree. So, another prolonged dip in the economy is likely to slow auto sales, and that would weaken OEM tyre and SBR demand,” a reseller said.

For more on SBR, visit ICIS chemical intelligence

By: Gene Lockard
1 713 525 2653

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