FocusEurope polyamide chain producers mull shuts if margins stay low

28 June 2012 17:28  [Source: ICIS news]

By Mark Victory

LONDON (ICIS)--Producers throughout the European polyamide chain are considering cutting back production rates or taking plants off line if margins do not improve in July, sources said this week.

“Prices are going down. We could see shutdowns if margins continue to be so low... we could see a similar trend on nylon. We want to recoup margins in July,” a caprolactam and nylon producer said.

Contract prices for benzene, which is the feedstock for the chain, have risen by €187/tonne ($234/tonne) from June last year.

During the same period, caprolactam prices have fallen by €190-230/tonne, nylon (or polyamide) 6 contract prices by €280-320/tonne, and nylon 6,6 by €50-150/tonne, resulting in squeezed margins.

The sharpest price falls have been in the adipic acid market, where contract values are €450-460/tonne below June 2011 levels. June adipic acid contracts in Europe are yet to finalise.

Nevertheless, adipic acid buyers continue to target strong decreases, with some sources saying that they had agreed June contracts at prices as low as €1,250/tonne FD (free delivered) NWE (northwest Europe). Although this was not widely confirmed, it would represent a fall of over €200/tonne.

The majority of buyers, though, continue to target price falls of around €30/tonne for June contracts.

Producers are targeting at least a rollover in June contract prices, because the €73/tonne increase in the June benzene contract price has left profitability low.

Weak margins have already led to NF Trading stopping production at its two adipic acid plants in the Ukraine.

NF Trading halted production at the first of its two plants, which each have a 30,000 tonne/year nameplate capacity, in mid-December. The plant was originally scheduled to come back on stream in March, but continued low margins have led to it remaining shut. Production at the second plant was halted at the beginning of May.

NF Trading will not restart its two 30,000 tonne/year plants in Ukraine in the near future, because of low margins, a company source confirmed this week.

Other producers in the polyamide chain are now beginning to discuss taking plants off-stream or lowering production rates if profitability does not improve.

Price falls throughout the polyamide chain have been caused by weak demand. Poor general economic conditions have reduced consumer purchasing power, reducing demand in the downstream fibre and automotive sectors.

Fibre consumption has been most severely affected. Although a minority of players estimated fibre producers’ operating rates at 80% of capacity, the majority of sources – including fibre producers themselves – estimate June fibre production rates at around 50-60% of capacity.

Because of the traditional summer holiday lull in consumption, the majority of players are not expecting demand to improve before September at the earliest.

Buying interest from small- and mid-sized automotive producers is also weak because of reduced consumer purchasing power. So far in 2012, premium-automotive demand has been unaffected by the effects of the general economic downturn because of high buying interest in China on the back of upwards social mobility.

Although some sources are now seeing signs of weakness in the premium automotive sector, the majority of players continue to see premium automotive demand as strong.

The strong demand for premium automotives is one of the reasons that nylon 6,6 prices have seen more limited erosion than their nylon 6 counterpart. Nylon 6,6 is predominantly consumed by the automotive industry, whereas nylon 6 also counts packaging and fibre among its major end-uses.

Uncertainty over the evolution of upstream benzene prices and the eurozone crisis have further limited consumption, and buyers are purchasing on a just-in-time basis.

"Everyone’s concerned about the financial situation in Europe. Fibre’s under pressure as a result,” a nylon producer said.

Asia is a key importer of European adipic acid, caprolactam and finished goods downstream of nylon. Throughout the second quarter, Asian buying interest has been low, which has caused increased material throughout the polyamide chain to remain in Europe, lengthening supply. This is again the result of uncertainty over general economic conditions.

Nevertheless, in May Chinese imports of caprolactam rose by 21% year-on-year, according to China Customs. Although this was a 19% fall in May compared with April, the year-on-year rise has surprised some players, and does not match with sentiment from the market itself at the time. There were various explanations given for the discrepancy.

One reason was unusually weak demand in May 2011 that was not in line with the year as a whole. Another was that the statistics cover arrivals rather than orders – which typically have a six-week lead time – with order volumes low in May, but not yet seen on arrival volumes.

Polyamide chain producers are hoping that upstream benzene prices will sharply decrease in June, giving them space to recoup some margins.

“July will see [margin] pressure again. Let’s hope benzene prices will decrease in July, otherwise we’re going to have big problems,” a caprolactam and nylon producer said.

Polyamide chain players said they would need at least a €100/tonne reduction in benzene costs in July to alleviate the need to reduce operating rates.

“Shuts [plant shutdowns] are very possible if margins don’t improve. If there’s no improvement in July and August, on softer benzene, or it’s less than we expect, we will lower operating rates,” a caprolactam producer said.

Nevertheless, even on the eve of the July benzene contract settlement, major producers and consumers still had no firm idea as to what the July contract price might settle at, since July benzene was trading in such a wide range.

Spot benzene was very actively traded this week, with the lowest deal heard for July at $1,175/tonne and the highest deal at $1,250/tonne. A prompt June trade was also done at $1,260/tonne. With such a wide range of spot deals, an accurate assessment of the outcome of Friday's settlement could not be made.

($1 = €0.80)

With additional reporting by Julia Meehan

By: Mark Victory
+44 208 652 3214

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