12 March 2012 00:00 [Source: ICB]
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Can butadiene producers get their ducks in a row?
The global butadiene sector has been marked by extreme volatility in pricing. Structural shortages today will lead to increased investment in the years ahead
Ten billion dollars in earnings before interest, taxes, depreciation and amortization (EBITDA) were transferred from the world's butadiene (BD) consumers to producers in 2011, according to Rafael Cayuela, butadiene commercial manager for global plastics and rubber producer Styron.
"This was exactly the same product. Nothing had changed except, of course, the supply and demand fundamentals," he said during a presentation at last week's 7th ICIS World Olefins Conference in Brussels.
The surge in pricing in 2011, and subsequent declines in Asia and Europe, reflected a problem that confronts any fundamentally tight market - end-users buying ahead out of anxiety that prices will go even higher. This is often followed by equally dramatic declines in pricing, as buyers operate on inventory once they see their margins are being squeezed.
Thus, after the collapses in BD pricing in Asia and Europe late last year, another bout of restocking appears to have taken place since January. This is a staggering change in fortune compared with 1998 when, according to a European industry source, he was offered 1 tonne of ethylene on the condition that he also had to take a tonne of crude C4s for free.
The response of the C4 industry to negative returns was obviously very little new investment. Meanwhile, demand grew - and then surged quite spectacularly with the rise of areas such as Asian auto ownership.
LIGHT FEEDS AND RUBBER TREES
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 and 2003 there was very little new planting of rubber trees because of better returns from other crops such as palm oil, according to Robert Simmons, head of rubber and tire research at economic research and consultancy service LMC International, in a speech at the same conference.
Natural rubber and synthetic rubber are substitutable for the manufacturing of finished products such as tires. Natural rubber supply has also been hit by adverse weather conditions, including heavy flooding, during the last three years. The obvious solution is to plant more rubber trees - and that is happening - but Simmons noted that it takes seven years for a rubber tree to grow sufficiently so it can be "tapped," or harvested.
However, one potential solution is already on hand for BD consumers. Globally, "contained butadiene" - the BD contained in crude C4s that isn't being extracted - exceeds demand by more than 20%, said John Wyatt, executive advisor for ICIS consulting - formerly Parpinelli TECNON - in a speech at the 7th ICIS World Olefins Conference.
This could, in theory, inspire a wave of BD extraction investment downstream of existing crackers. However, one synthetic rubber industry source said: "Many crackers are too small to supply enough crude C4s for worldscale BD facilities. A worldscale plant needs to be 300,000 tonnes/year.
"Another issue is the toxicity of BD. It is carcinogenic, and so when a vessel has moved BD 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."
Yet it is no surprise that on-purpose routes to BD are being developed. US-based TPC Group is planning to bring a 270,000 tonne/year BD facility on stream, based on its butane dehydrogenation process, in Houston, Texas. Funding for the second phase of the engineering work has been released, and the permitting process is underway, said John Medico, TPC's business director for crude C4s and BD in a presentation at the conference. The project is expected to be fully operational by 2016.
Rising BD prices have increased the prospects for on-purpose production of the monomer, an executive at US-based Chevron Phillips Chemical said at the CERAWeek energy conference in Houston last week. "BD values have soared in the recent past," said Mark Lashier, executive vice president, olefins and polyolefins, for the company. "Companies will look at butane dehydrogenation," he added.
The US March BD contract settled at a split of $1.45/lb ($3,197/tonne, €2,430/tonne) and $1.55/lb, as assessed by ICIS. That is up by as much as 23% over the February contract. There are also rumors that a local producer in China will start up a 100,000 tonne/year butane dehydrogenation-to-BD plant at some point this year, added Styron's Cayuela.
Japan-based Asahi Kasei Chemicals plans to produce BD from butene, via its new BB-FLEX technology. The company is considering building a 500,000 tonne/year plant in Mizushima, Japan, based on the process, for start-up in 2014. Asahi Kasei plans to use BD from the new plant to produce synthetic rubber.
The company has a combined capacity of 105,000 tonnes/year of solution styrene butadiene rubber (S-SBR) and low-cis polybutadiene rubber (PBR) at its Kawasaki factory in Kanagawa prefecture. The company also operates an S-SBR/low-cis BR swing plant in Oita, with a combined capacity of 35,000 tonnes/year.
However, a lot more BD capacity - whether on-purpose, or via steam crackers - is likely to be needed to bring the market back into balance, thanks to booming demand in emerging markets. In China, for example, auto sales reached 18m units last year, and could increase to 30m−35m by 2018, according to global market research company J.D. Power.
The time-honored tradition of petrochemicals has, however, been to overbuild a product, to underbuild and then to overbuild again.
Any bets that there will be too much BD capacity added over the next 5-10 years, in an overreaction to today's shortfalls?
Additional reporting by Al Greenwood in Houston
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