OUTLOOK ’12: Weak polyamide chain demand causes margin fears

03 January 2012 15:30  [Source: ICIS news]

By Mark Victory

LONDON (ICIS)--Consumption throughout the European polyamide (or nylon) chain is expected to remain broadly flat with 2011 in 2012, buyers and sellers predict, but with trading conditions inversed.

“We expect a flat 2012,” said one caprolactam (capro) and nylon producer.

In 2011, the polyamide chain saw strong consumption during the first half of the year, spurred by exports of finished automotives to Asia, but deteriorating macroeconomic conditions in the second half limited demand.

For 2012, sources expect a weak first half of the year because of financial instability, with recovery in the second half.

“The first part of 2012 – especially the first quarter – will be challenging, but volumes in 2012 will be roughly the same as 2011,” a cyclohexane (CX) buyer said.

Nevertheless, the major end-use applications for the polyamide chain – automotives, construction and textiles – are heavily linked to GDP. As a result, demand growth in the polyamide chain will be dominated by macroeconomic conditions.

“Independent of our chain, the global economy is the driving force [for petrochemical demand]. We have to be modest in our forecasts for 2012,” one capro producer said.

Because financial markets are volatile and the evolution of the eurozone crisis is uncertain, forecasts are not firm and are subject to heavy revision.

“2012 will be a tough year because there’s so much uncertainty,” a CX and capro trader said.

Declining macroeconomic conditions caused dramatic price drops in the polyamide chain during the fourth quarter of 2011.

During the fourth quarter, nylon 6 virgin polymer contract prices fell by €350/tonne ($455/tonne), and nylon 6,6 virgin polymer contracts dropped by €450/tonne. Nylon feedstocks capro and adipic acid (ADA) saw drops of €290–310/tonne and €390–490/tonne respectively.

The result has been reduced margins. The effect of low margins has already been seen in the ADA market.

NF Trading halted production at one of its two ADA lines in Ukraine in December because of unfavourable trading conditions, a company source confirmed. Each of the two lines at the plant has a nameplate capacity of 30,000 tonnes/year. The line will be shut until March, or until financial conditions improve, the company source said.

The plant was shut because of low margins and expectations that raw material price rises will outstrip ADA price increases in the first half of 2012, according to the source.

Throughout December, several European ADA producers said that they were considering halting ADA production because of weak demand and low margins. Several producers said that this will most likely happen in January if margins see no improvement.

“In 2012, I think producers will do something to halt the reduction of prices [for ADA]. Historically, when prices approach €1,000/tonne, they [producers] reduce capacity,” an ADA buyer said.

There are concerns that if crude oil prices remain above $100/bbl and general economic conditions deteriorate, margins will be squeezed further.

Uncertain general economic conditions caused heavier-than-usual destocking in the fourth quarter of 2011. This was not only to reduce working capital in year-end balance sheets, but to increase cash reserves to help offset the potential risks of a double-dip recession.

Buyers expect inventory levels to remain low into 2012, as economic fears are overriding stock needs.

“January [2012] we expect to be 30% lower than [the same period] in 2011, as no-one wants big inventories,” one nylon compounder said.

Pipelines are low because of the heavy destocking. Several sources caution that low inventories in 2012 will lead to price spikes, and temporary bubbles could become a feature of the market. The result will be increased market volatility.

“Inventories are low, so any spike in demand will cause problems,” another nylon compounder said.

($1 = €0.77)

For more on CX, capro, ADA and nylon, visit ICIS chemical intelligence

By: Mark Victory
+44 208 652 3214

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