FocusEurope solvents under volume pressure, Q1 prices to rise

28 February 2012 13:07  [Source: ICIS news]

By Cuckoo James

LONDON (ICIS)--Solvents producers could continue to face pressure on volume growth in Europe in the first quarter, adding to concerns over margin erosion from lower plant utilisation despite an upward pricing trajectory, analysts and industry sources said on Tuesday.

Market sources also maintain that, unlike in the first quarter of 2011, prices for many solvents in the ether and ester groups are rising on higher feedstock costs alone and are yet to be supported by good demand or tight supply, with some industry sources calling it a “bubble”.

Demand for these solvents first began to slow down in the second half of last year on underlying economic uncertainty in Europe. Volumes have not picked up majorly since then, although it has been described as “better-than-expected” from early January.

Looking back to last year, one of the solvents producers, German major BASF, said its first and second quarter margins for its petrochemicals segment, one among its three chemical businesses, “developed positively” on strong demand.

“Overall, capacity utilisation at our plants were good. As a result of strong demand, there were temporary supply bottlenecks for some products, in particular acrylates and solvents. Our margins therefore developed positively. Income from operations was above the level of the previous year,” the company said in its 2011 annual report.

BASF produces solvents including glycol ethers such as butyl glycol (BGE), butyl di glycol (BDG), propanol methoxy (PM), glycol ether acetates such as propanol methoxy acetate (PMA), and esters such as butyl acetate (butac).

Plant capacity utilisation is not currently at optimum levels, a major solvents producer in Europe said.

“General demand is weaker, and utilisation of the plant is less than 100% but it doesn’t matter because demand doesn’t need that,” the producer said.

Many solvents producers have taken a similar view. Most maintain it is better to sell lower volumes than turn a loss at every tonne.

But Lutz Gruten, an analyst tracking the chemicals sector at Commerzebank, draws attention to the connection between declining volumes and margin erosion.

Looking at BASF's fourth quarter 2011 results, he said: “BASF was able to pass on higher feedstock prices which is remarkable in times when volumes are down,” he said.

But he continued: “Lower volumes led to lower utilisation rates and the adjusted EBIT [earnings before interest and tax] margin for the entire chemical segment came down to 12.2% after 19.6% in Q3. We assume that the margin erosion in petrochemicals was even more pronounced."

Oxea, another solvents producer that manufactures butac, compared its “very strong first half year of 2011” favourably with its fourth-quarter performance which “was affected by the continued softening of the world economy and destocking activities along the value chain in the entire industry”.

Although most producers remain firm on higher prices, solvents producers “secretly” remain concerned about first-quarter volumes this year, said a solvents buyer at a major coatings company.

“I hear from a lot of our suppliers that they are not seeing demand. Suppliers are crying, they are complaining about poor margins,” said the buyer.

He added: "Again, as consumers we are not sure we can absorb the increases."

The prices of raw materials ethylene and propylene have been rising through the first quarter. The European March propylene contract price settled up by €90/tonne at €1,195/tonne, while ethylene was agreed at a record-high €1,305/tonne, up by €86/tonne.

Solvent producers had been anticipating the feedstock increases, and are targeting higher prices for March.

Prices of the ether group of solvents, including BGE, BDG and PM, have risen by up to €110/tonne, €130/tonne and €70/tonne respectively in February alone, and producers are targeting increases of up to €100/tonne ($133/tonne) for March.

“I talk to traders - they are complaining and complaining. It is not a healthy market... If they increase the prices, it will be third time [this year]," said a sales executive at a solvents distribution company.

He added: “It’s a bubble that is going to burst. It’s the same as we had in 2011. I don’t think the market will pick up. It’s always a matter of demand."

($1 = €0.75)

By: Cuckoo James
+44 (0) 208 652 3214

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