05 March 2012 00:00 [Source: ICB]
Asia phenol producer margins will be under increasing pressure as a result of new capacities due to come on stream and poor derivative demand amid an uncertain global economic outlook.
"2011 was a good year for phenol makers," a Northeast Asian producer says. "Margins in 2012 will definitely be worse than those seen in 2011."
China's total phenol supply in 2012 is forecast at around 1.75m tonnes, up 7.4% from 2011, while import growth is expected to be 3% and domestic production should grow by 11% to around 1m tonnes, industry sources say.
"2012 will be a challenging year for phenol makers, given the planned new capacities and global economic uncertainties," says a regional major.
A Northeast Asian trader adds: "Phenol producers will have to keep operating rates in check from time to time as margins will be under constant pressure from the increase in supply."
China will be able to increase capacity to 1.22m tonnes/year by the middle of 2012, according to market sources. During the 2013-2015 period, China is targeting to expand total phenol capacity to 3.14m tonnes/year - an expansion of 1.95m tonnes/year.
The volatility in crude oil prices and feedstock costs also puts phenol producer margins under pressure, market sources say.
Spot phenol traded in Asia at $1,525-1,560/tonne (€1,139-1,165/tonne) CFR (cost and freight) China during the week ended February 24, as assessed by ICIS.
Phenol prices hit fresh highs in the second quarter of 2011, driven by tight regional supply following maintenance shutdowns at facilities in Northeast Asia and production disruptions in Japan in the aftermath of the March 11 earthquake and tsunami.
The supply crunch was made worse by a shortage of deep-sea cargoes amid a severe shortage in feedstock cumene. The availability of deep-sea cargoes in the region declined in 2011 because of high production costs and limited vessel space, say traders.
"We enjoyed good margins in the first half of 2011," says a second regional producer, who added that the spread between phenol and benzene hit $800-900/tonne in the second quarter - a rare occurrence.
However, spot phenol prices declined sharply from September 2011 and fell to a two-year low in November, as tightened credit and the appreciation of the Chinese yuan weakened derivative demand.
The majority of regional phenol producers had been running their facilities at reduced rates of 60-80% since the third quarter of 2011 until early this year because of poor economics.
The spread between phenol and feedstock benzene prices had narrowed to $100-200/tonne in November and December 2011. This level is considered unhealthy by industry players, as profit breakeven is at least $300/tonne.
ON THE REBOUND
Then, however, Asia phenol prices rebounded sharply in the second half of December 2011 - up by $170-180/tonne from early December to $1,300-1,330/tonne CFR (cost & freight) China on December 30, triggered by tight supply following production cuts at regional facilities.
The upward momentum continued after trading resumed in the major China market following the Lunar New Year holidays in late January.
Although operations at downstream plants were not back to full force after the festive period, a recovery in demand is anticipated as downstream manufacturers are gradually ramping up production. But concerns about the global economy kept buyers cautious.
Most regional phenol facilities have resumed full operations since early February following an ease in cost pressure. However, supply is tightening because of a shortage in deep-sea cargoes. The arbitrage window to move cargoes from the US and Europe to Asia is closing given the sharp rise in feedstock costs, traders say.
Meanwhile, it remains uncertain if there will be further delays in the start-up at China-based Kingboard Chemical's 320,000 tonne/year phenol/acetone plant in Eastern China. The facility was initially scheduled to come on stream in March, but test runs have been delayed because of the sharp rise in feedstock benzene and propylene costs.
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