FocusMay polyamide chain negotiations paralysed by uncertainty

17 May 2012 13:59  [Source: ICIS news]

By Mark Victory

LONDON (ICIS)--European contract negotiations for May are being delayed throughout the polyamide chain because of growing uncertainty, sources said this week.

“Benzene’s turbulent, and dropped significantly – everyone’s waiting. Then the Greece developments – everyone’s nervous. The developments are delaying contract negotiations,” an adipic acid compounder said.

Volatile upstream costs, growing macroeconomic fears, reduced purchasing power and low export volumes to Asia have culminated in a perfect storm of uncertainty.

“Buyers are limiting inventories, cautious buying. The macro-economics don’t lead to any good signals... In Europe, we can’t see a clear trend,” a caprolactam producer said.

Buyers and sellers of nylon (or polyamide), caprolactam and adipic acid throughout are increasingly moving to the sidelines of the market until a clearer picture emerges – while simultaneously becoming reluctant to give price targets or enter price negotiations.

“It [contract negotiations] will be difficult this month. It’s too complicated... oil prices are falling – it’s a natural reaction to have a cautious approach. Since the 2008 recession, buyers learned to play with inventories,” a caprolactam buyer said.

The chief architect of the uncertainty is the fall in upstream benzene spot values. As of noon London time on 17 May, they had fallen by $80-90/tonne (€63-71/tonne) since their 3 May peak of $1,270-1,290/tonne CIF (cost, insurance and freight) ARA (Amsterdam, Rotterdam, Antwerp), following broadly rising prices in April.

At the same time on 17 May, benzene spot prices were at $1,190-1,200/tonne CIF ARA.

Caprolactam, adipic acid and nylon players are waiting for benzene spot prices to stabilise before concluding May contract negotiations, so that they will have a better idea of costs moving into June.

“It’s a question of how upstream costs develop. Wait-and-watch is what we’re seeing,” a caprolactam producer said.

Fears over the threat of a potential Greek exit from the eurozone and wider macro-economic uncertainty are limiting consumption. Buyers throughout the polyamide chain are purchasing on a wait-and-see basis and reducing inventories to mitigate macro-economic risks.

In Europe, reduced consumer purchasing power resulting from austerity measures has limited offtake from the downstream textiles and automotive markets.

Neither producers nor buyers in the polyamide chain are willing to give pricing aims for May contracts, as the situation is too fluid and targets may move dramatically if there are any rapid changes in macro-economic conditions.

Weak Asian demand for caprolactam and adipic acid has placed further downward pressure on European prices, and some players are concerned that new production capacity in Asia could further weaken buying interest.

“With the new Chinese capacity, the outlook’s not brilliant. There’s nothing positive,” an adipic acid trader said.

Asia is a major importer of European caprolactam and adipic acid. Weak buying interest has resulted in material previously earmarked for Asia remaining in Europe, increasing supply at a time when domestic consumption is also weak.

Low consumption in Asia is also affecting nylon demand. Nylon is not exported to Asia in high volumes, but is to major purchasers of finished goods derived from nylon, such as automotives and textiles. Textiles manufacturers in Asia are also major buyers of European caprolactam and adipic acid.

Traditionally, May would be peak season for textiles, but buying interest has been weak in 2012 because of bearish macro-economic sentiment and fears over the contagion risk of the eurozone debt crisis.

Asia has high stocks, so poor demand. It’s mostly China. The synthetic leather season has already stopped. Shoe-sole demand’s also turned down. Europe is bad on negative economic sentiment. You wonder if the season ever began,” an adipic acid producer said.

In Europe, fears over the eurozone debt crisis – particularly the threat of a potential Greek exit from the euro – are also limiting consumption. Buyers have reduced inventories and are purchasing on a wait-and-see basis to mitigate risks.

“You should be cautious if you’re living in Europe,” an adipic acid buyer said.

This is adding further downward pressure on prices, and exacerbating market uncertainty, with players adopting a cautious approach in case of a rapid escalation of the situation.

“I expect a decrease for May, but the amount is questionable. With the damage in the eurozone, it could worsen rapidly. Demand is hand-to-mouth, consumers have no purchasing power. Under the circumstances, everyone is trying to hold off doing anything,” a nylon compounder said.

Bearish general economic conditions have limited consumer purchasing power, suppressing demand from the end-use small and mid-sized automotive manufacturers.

A heavy public holiday schedule across Europe has further limited buying interest in May.

Buyers and sellers throughout the polyamide chain said pricing targets could evolve rapidly given the volatility in the market. Buyers are aiming to protract negotiations as long as possible, believing that the later in the month that contracts settle, the lower the price will be.

“We don’t like it, but there’s a lot of uncertainty. The feeling is, the longer we wait, the more it will drop. The model isn’t working, we have to quote downstream for June, but we don’t even have an idea for May,” a caprolactam buyer and nylon 6 producer said.

($1 = €0.79)

By: Mark Victory
+44 208 652 3214

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