Asian butadiene keeps soaring

27 February 2012 00:00  [Source: ICB]

 Bird soaring high, Frank Kovalchek
 © Frank Kovalchek
Asia butadiene (BD) spot prices have surged above $4,000/tonne (€3,024/tonne), but the price upsurge may fizzle out in the second quarter as the major consumers of BD - the downstream synthetic rubber (SR) producers - halt or cut their output because of eroding margins.

Spot offers for fresh March shipments of BD soared to $4,500/tonne CFR (cost and freight) NE Asia (Northeast Asia) as traders with stock-in-hand pushed prices to a new record high. However, downstream SR makers are frustrated with the unabated BD price surge, as they see their margins fall into negative territory.

Several downstream butadiene rubber (BR) producers including China'sShanghai Gaoqiao, South Korea'sLG Chem, Korea Kumho Petrochemical (KKPC), Taiwan's TSRC and Thailand's BST Elastomers, have either shut down their lines or cut operating rates.

"We have no choice but to cut the operating rate of our 55,000 tonne/year butadiene rubber plant to 70% of capacity as our margins are negative," a company source at BST Elastomers says. "BD prices are higher than BR and this is not sustainable," another SR producer says.

BD prices were at $3,900−4,000/tonne CFR NE Asia by the week ended February 10, while downstream BR prices were at $3,700−3,800/tonne, according to data from ICIS.

PRESSURE ON PROFITS

A spread of about $600−700/tonne is required for BR makers to post any margins, industry sources say. BD is the feedstock used to make synthetic rubber such as BR and styrene butadiene rubber (SBR). Traders scrambling to secure dwindling BD stocks in a tight market have posted bids higher than expected for sales tenders issued by several producers in Asia.

The latest sales tender issued byBangkok Synthetics (BST) of Thailand was awarded to a Japanese trader at $4,030/tonne FOB (free on board) Mab Tha Phut on February 13. The 2,000 tonne spot cargo is scheduled to head to Northeast Asia in early March, according to sources.

With inter-regional freight costs at $120−150/tonne, this works out to around $4,150−4,180/tonne CFR NE Asia, traders say. But whether BD prices can still hit a new record high of $4,500/tonne CFR NE Asia remains to be seen; supply is likely to ease with deep-sea cargoes heard heading to Asia in March.

About 5,000 tonnes of BD from Europe are likely to be shipped to Asia in March, with downstream SR makers unwilling to consider offers above $4,000/tonne CFR NE Asia, traders say. BD spot prices have rollercoastered since last year, when prices bottomed at $1,550/tonne CFR NE Asia in November, after hitting a record high at $4,300/tonne in July, ICIS data show.

A heavy cracker shutdown, cracker outages and output cuts in Asia, Europe and the US have fueled the BD price surge since November.

LOW DOWNSTREAM DEMAND HITS EU PROSPECTS

European petrochemical players are generally having difficulty trying to understand where the markets are heading in 2012; the situation is no different for butadiene (BD).

The European market is balanced to tight, but as domestic consumers are keen to point out this is because of the strength of exports, not because of buoyant local demand.

Butadiene graph

Asian demand, because of positioning ahead of the Lunar New Year and upcoming cracker maintenance, supported the European market through November and December.

This has continued with spot prices rising rapidly, but amid growing uncertainty about whether these costs can be passed on down the chain as demand is lackluster.

The US played a central role in the extreme price developments seen in the first half of 2011. This has not been the case so far for 2012, highlighting the lack of visibility in downstream markets; although some sources argue that the US will have no choice but to import significant volumes because of a particularly high cracker turnaround slated in the spring.

CONFIDENCE DWINDLES

The short-term view is that macro­economic concerns and hence depressed consumer confidence will continue to impact on demand for BD derivatives such as styrene butadiene rubber (SBR).

Of concern is the lack of demand for tires and the glut of winter tires languishing in warehouses because of a mild European winter. The recent cold snap is perhaps too late to make a difference.

Major global tire manufactures are signalling some ­reduction in BD consumption in the next few weeks. This is a cause of worry for producers, which would usually expect to be approaching the peak demand season.

However, the same economic concerns are impacting on ethylene and ethylene derivatives at a time when Europe is still adapting to new Middle East and Asian capacities.

This means that European crackers will most likely continue to run at reduced rates thereby limiting crude C4 butadiene feedstock, not to mention the pressure to optimise margins through a flexible feedslate: a lighter feedslate such as LPG also produces less crude C4s.

So, while domestic demand might beckon a slow recovery, supply restrictions will counteract this occurring.

European BD producers are fearful of the Asian bubble bursting, but many believe it is just a matter of time before it does.

No-one has expressed a clear view.

"Everyone is sitting on the fence," says one major BD producer, adding: "The year started in a positive way; will it continue, or will there be a reduction?"

TIGHTER ASIA SUPPLY HIKES US BD PRICES

US butadiene (BD) prices began 2012 on a sharp uptrend, rising by nearly 22% in the first two months of the year on tight supply and higher prices in other regions, particularly Asia.

The increase, which put most US contracts at $1.18/lb in February, could be only the beginning, according to some market participants that are predicting BD could climb back to the peaks seen in August 2011, when the product hit $1.75/lb.

The uptrend is being mostly driven by tighter supply resulting from limited availability of crude C4 in the US, which is increasingly reliant on ethane as its olefins feedstock of choice. Also lending support to US prices are a busy cracker turnaround season and the shutdown of BD extraction units associated with these crackers.

Three US crackers have been shut down since the start of the year. Two of those units remained offline in early February, while five other US producers have planned maintenance scheduled for the next few months.

With limited supply at home, the price outlook for the US could hinge on how BD will fare in markets like Asia, where prices have more than doubled since November 2011 because of strong demand.

Opinions are mixed on how long the surge in Asia can be sustained. Some believe BD is poised for a correction, but others see a continued uptrend.

US AVAILABILITY SLUMPS

Meanwhile, BD availability in the US will remain flat or potentially decline, as US crackers continue to move from naphtha to lighter feeds, limiting their output of C4's.

Ethane, which yields negligible amounts of C4s, accounts for around 60% of the US cracker feedstocks. This figure is likely to increase in the next several years, as crackers continue to go "light."

At least two more US crackers plan to increase feedstock flexibility in the next three months, including one unit that will switch some of its furnaces from naphtha to ethane.

Ethane will also be the dominant feedstock of the new US crackers that are being planned or expanded. This will make it unlikely that the US will have any incremental BD capacity until TPC Group fires up an on-purpose BD plant in 2015.

The facility in Houston will have 600m lb/year (270,000 tonnes/year) of capacity. The project, which will be coupled with a new TPC Group Oxo-D production unit, will use butane as its primary feedstock.


By: Helen Yan
+65 6780 4359



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