AFPM '12 - INSIGHT: Mood improves but structural issues remain

03 April 2012 17:35  [Source: ICIS news]

By Nigel Davis

SAN ANTONIO, Texas (ICIS)--Rising petrochemical prices don’t tell the whole story, we wrote in Insight in mid-March. Downstream market prices then were rising, with talk of better-than-expected demand in February and March. It was clear that, though the plot was far from certain, there would be more twists and turns.

Dow Chemical’s announcement on Monday of closures worldwide in expandable polystyrene (EPS) and as many as 900 job losses, underscores the fact that all is not right.

The growth in demand for chemicals in China has slowed markedly - a reaction, perhaps, to the 2010 boom but a slowdown nevertheless.

There is some growth in the large markets for chemicals in the US and Europe but nothing to get too excited about.

The ICIS petrochemical index (IPEX) for April is up 2.9% from a revised March figure and its highest since September 2011.

The indices for Europe and the US are both up by around 5.7% in US dollar terms with little dollar to euro currency effect. The sub-index for Asia, though, is up by only 0.4%.

The polymer sub-index showed the strongest increase of 5.4%, followed by olefins (+4.4%) and aromatics (+1%).

Supply/demand factors underly the increases with some markets tightening because of production outages. ICIS noted on Tuesday that: “The European chemicals market proved to be resilient despite the ongoing economic concerns. Of all component chemicals of the European IPEX basket, benzene was the only contract price to see a decrease in euro terms for March.

“Butadiene (BD) led the price increases, soaring by 12.8%. Polymers and olefins also experienced strong price hikes, with polyethylene (PE) prices approaching previous record highs and the ethylene contract price achieving a new high.”

By contrast, the Asian IPEX showed almost no growth with a steep 8% fall in butadiene prices offset by only modest price increases for other products on the back of weak demand.

Lacklustre economic growth and industrial and commercial demand mean that life is still tough in some markets.

Dow is closing plants and cutting capital spending in expandable polystyrene (EPS) and the polyurethane intermediate toluene diisocyanate (TDI) because of the tough and uncertain economic conditions.

Dow’s Styrofoam branded EPS and its polyurethanes are widely used as insulation materials in construction. In many respects, they are seen as much needed materials in the drive towards a more energy-efficient future.

“These actions, while difficult, are in full alignment with our commitment to continually manage our portfolio to adapt to changing and volatile economic conditions, as we are seeing particularly in western Europe, and to preferentially invest in our fast-growing, technology-rich businesses,” Dow chairman and CEO Andrew Liveris said on Monday.

“Today’s announcement further demonstrates our resolve and ability to take swift, strategic cash flow interventions that will keep Dow solidly on a trajectory to deliver $10bn in EBITDA [earnings before interest, tax, depreciation and amortisation] in the near term.”

The company expects to save $250m/year from the closures and layoffs. The measures will costs $350m.

They involve the closure over the next two years of three Styrofoam EPS plants - located in Estarreja, Portugal; Balatonfuzfo, Hungary; and Charleston, Illinois; and the idling of a plant in Terneuzen, the Netherlands.

Dow will also close its toluene diisocyanate (TDI) plant in Camacari, Brazil and “consolidate certain other assets in its polyurethanes and epoxy businesses, optimising their operations while remaining focused on meeting customer needs and sourcing through non-impacted assets”.

The company’s actions may be construction industry and particularly styrenics-specific but they are symptomatic of the times.

Chemical companies continue to look at costs, particularly in the current operating environment.

Some end-use markets for chemicals remain in the doldrums because of macroeconomic weakness and the deep structural changes brought about by the sub-prime mortgage-led financial crisis.

The 2008 financial crisis changed many things. The sovereign debt overhang in many nations continues to weigh heavily on economic growth and the outlook for manufacturers of important industrial materials and consumer products, like chemicals.

The mood of this industry, particularly in North America if the AFPM International Petrochemical Conference is anything to go by, has improved markedly, even in the past few weeks. But in some markets, structural issues exposed by financial turmoil and economic uncertainty have still to be addressed.

Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog
Bookmark Paul Hodges’ Chemicals and the Economy blog


By: Nigel Davis
+44 20 8652 3214



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