FocusEurope buyers want feedstock decreases passed on in full

25 June 2012 17:13  [Source: ICIS news]

LONDON (ICIS)--Petrochemical producers in some derivative markets should relieve pressure on buyers and distributors by passing on feedstock cost decreases at the full rate instead of keeping most of the price gains for themselves, sources have told ICIS.

Earlier this year when feedstock costs rose to sometimes unprecedented levels, manufacturers raised prices but did not always pass on the entire increase to customers, to maintain sales volumes.

In turn, now that feedstock costs are falling they are unwilling to pass on the full decreases, in an effort to recover margins lost during the earlier part of the year.

However, players from the polycarbonate (PC), epoxy resins, methyl methacrylate (MMA) and bisphenol A (BPA) markets told ICIS in a snap survey that it is wishful thinking from producers to expect buyers and traders to accept price increases or to bear the brunt of escalating feedstock costs.

"Sometimes producers talk of tough market conditions but still report large profits, so I think the support should come from the producers," a trader said on Monday.

To maintain profit margins, producers have been targeting price increases in most derivative markets – which they have had mixed success in implementing in recent months.

However, with slowing downstream demand and cooling economies in Europe, most end-users are now operating with strict inventory management and are keen to switch between suppliers where possible in search of better deals and lower prices.

As a result, European manufacturers have begun to decrease prices as and when possible to maintain sales volumes, keep customers and to keep Asian competition out of Europe.

However, this is not a situation that can be sustained in the long run. This is because some chemical makers are now in negative margin, and to maintain profitability, feedstock costs either have to decrease or producers will need to cut operating rates.

If weak demand and high raw material costs persist for a long period, smaller players may have to shut down temporarily or they may eventually go out of business, sources said.

"If after reducing production capacity smaller players are still struggling, they may have to merge, but I don't think key players will ever quit the market," a PC trader said on Monday.

Producers argue that to keep suppliers in business, buyers and traders in Europe should be more cooperative.

Some buyers in Europe have very strict product specifications, which only high-quality European suppliers can meet.

Buyers know that to have a healthy market in Europe, some of the burden has to be shared, because if not, reliable and local producers will be in a tough situation, a producer said.

However, buyers and traders are of a different opinion. They argue that because supply in these sectors is structurally long, if one producer goes out of business the others will fill the gap.

As the possibility of another financial crisis is very real, some market participants are worried that they are going to be caught between a rock and a hard place.

Will they carry on producing at a loss, or increase prices and lose customers? The difference between now and 2008–2009 is that back then European governments could implement initiatives such as tax cuts to stimulate growth and help chemical producers.

However, because this time around many governments are in trouble themselves, they will not be able to step in with new initiatives. This will likely send some chemical producers to the brink of collapse, a number of sources said.

"Our costs are higher than sales can bring in [and so] our margins are shrinking, which is unsustainable for the industry," a PC producer said.

As with anything else during uncertain times, only time will tell what the outcome of the European debt crisis will be, and what will become of Spain's banking problems, but as one player put it, there is one thing that everybody can do – hope for the best and prepare for the worst.

By: Janos Gal
+44 208 652 3214

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