Corrected: INSIGHT: World's butadiene consumers took $10bn hit in 2011

06 March 2012 13:00  [Source: ICIS news]

Correction: In the ICIS story headlined "INSIGHT: World's butadiene producers took $10bn hit in 2011" dated 6 March 2012, please read the headline as "World's butadiene consumers ..." instead of "World's butadiene producers ..." Also, in the first paragraph please read ... were transferred from world's butadiene consumers to its suppliers ... instead of ... were transferred from the world’s butadiene producers to its end-users ... A corrected story follows.  

By John Richardson

LONDON (ICIS)--Ten billion dollars in earnings before interest, taxes, depreciation and amortisation (EBITDA) were transferred from world's butadiene consumers to its suppliers during 2011, estimated Rafael Cayuela, butadiene commercial manager for Styron, the global plastics, latex and rubber producer.

“This was exactly the same product, the same customers and the same suppliers - nothing had changed except, of course, the supply and demand fundamentals,” he added during a presentation at last week’s 7th ICIS World Olefins Conference in Brussels.

The surge in pricing during 2011, and the subsequent declines in Asia and Europe (see chart below), reflected a problem that confronts any fundamentally tight market: End-users buying ahead out of anxiety that prices will go even higher, followed by equally dramatic declines in pricing as buyers operate on inventory once they see that their margins are being squeezed.Butadiene chart 

Thus, after the collapses in butadiene pricing which occurred in Asia and Europe late last year, another bout of restocking appears to have occurred since January. The signs were ominous in late February in Asia that we could be entering yet another cycle, as synthetic rubber producers cut operating rates and brought turnarounds forward due to squeezed profitability

This is a staggering change in fortunes compared with 1998 when, according to a European industry source, he was offered a tonne of ethylene on condition that he had to also take a tonne of crude C4s for free.

The response of the C4s industry to negative returns was obviously very little new investment. Meanwhile, demand grew and then surged quite spectacularly with the rise in, for instance, Asian auto ownership.

Supply has been made even tighter by US producers switching to lighter cracker feeds as a result of the shale-gas boom. In addition, many of the new crackers brought on stream over the last five years have been ethane-based.

And it gets worse: Between 1998-2003, there was very little new planting of rubber trees because of better returns from other crops such as palm oil, said Robert Simmons, head of rubber and tyre research at the economic research and consultancy service, LMC International, in a speech at the same conference. Natural rubber and synthetic rubber are substitutable for manufacturing of finished products such as tyres.

Natural rubber supply has also been hit by adverse weather conditions, including heavy flooding, during the last three years, he added.

The obvious solution is to plant more rubber trees, and that is happening, but Simmons said that it takes seven years for a rubber tree to grow sufficiently so it can be “tapped”, or harvested.

Potentially, however, a solution is already on hand for butadiene consumers:  Globally, “contained butadiene” (the butadiene contained in crude C4s that isn’t being extracted) exceeds demand by more than 20%, said John Wyatt, executive advisor for ICIS (formerly Parpinelli TECNON), in another speech at the conference.

This could, in theory, inspire a wave of butadiene extraction investment downstream of existing crackers.

But a synthetic rubber industry source said: “Many crackers are too small to supply enough crude C4s for worldscale butadiene facilities. A worldscale plant needs to be 300,000tonne/year.

“Another issue is the toxicity of butadiene. It is carcinogenic, and so when a vessel has moved butadiene, it has to be purged with nitrogen. Ship owners often demand that producers meet the cost of purging, which adds an economic barrier to investment.”

Perhaps it is no surprise, therefore, that on-purpose routes to butadiene are being developed.

Texas Petrochemical Co is, for example, planning to bring on stream a 270,000 tonne/year butadiene facility, based on its butane dehydrogenation process, in Houston.  

Funds for the second phase of engineering work have been released and the permitting process is underway , said John Medico, TPC’s business director for crude C4s and butadiene, in a further presentation at the conference.  The project is scheduled to be fully operational by 2016.

There are also rumours that a local producer in China will start up a 100,000 tonne/year butane dehydrogenation-to-butadiene plant at some point this year, added Styron’s Cayuela.

Asahi Kasei Chemicals plans to produce butadiene from butene, via its new BB-FLEX technology. The Japanese producer is considering building a 500,000 tonne/year plant at Mizushima in Japan, for start-up in 2014, based on the process.

But  a lot more butadiene capacity, whether on-purpose, or via steam crackers, is likely be needed to bring the market back into balance, thanks to booming demand in emerging markets. In China, for example, auto sales reached 18m last year and could increase to 30-35m by 2018, according to global market research company, JD Power.

The time-honoured tradition of petrochemicals has, however, been to overbuild a product, to under-build and then to overbuild again. Any bets on too much butadiene capacity being added over the next 5-10 years, in an overreaction to the current shortfalls?

By: John Richardson
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