INSIGHT: Polyamide chain hit by raw material costs, outages likely

20 July 2012 16:08  [Source: ICIS news]

By Mark Victory

LONDON (ICIS)--I tune out, uninterested in the anti-ageing cream advert interrupting my television programme. I’m not the target audience. But as I switch off, a disclaimer catches my eye – ‘results may vary’.

The disclaimer is true of the polyamide chain. Opinion is divided on the effect of raw material price movements on operating rates throughout the chain - depending on final end-use.

Upstream benzene spot prices in Europe are trading well above benzene contract prices, with spot benzene price ideas for July reaching as high as $1,425/tonne (€1,154/tonne) CIF (cost. insurance and freight) ARA (Amsterdam, Rotterdam, Antwerp) in the first half of this week.

This has led to speculation throughout the polyamide chain of sharp raw material cost rises in August, and stalled negotiations for July adipic acid (ADA) and caprolactam (capro) contracts as confusion reigns supreme.

“It’s [the benzene rise] in contrast with the trend in the market... it’s very difficult to put together information and a little frustrating. Adipic [acid] is in a very bad shape. Producers are not happy,” said an ADA trader.

At the same time, demand in most end-use polyamide chain sectors is weak.

The result has been squeezed margins. Capro, ADA and nylon (or polyamide) producers will cut operating rates sharply or shut down plants if they cannot restore profitability to their respective markets.

“This will [hugely impact the market] – especially for the next months. It will be a tough situation in August,” an ADA trader said about spot benzene prices. “I believe some [adipic acid] producers will need to leave the market; others will need to move prices up. Benzene is allowing nothing at the moment.”

Nevertheless, demand levels and margin erosion are dependent on which particular end-use industry players are linked to.

Fibre consumption in July 2012 has been forecast by market players at around 10-20% below July 2011 levels. This is because of bearish macroeconomic conditions, which have reduced consumer purchasing power, and the low season for fibre and automotive production.

Fibre producers are operating at around 50% of capacity, according to market estimates.

Typically, fibre manufacturers would turn down rates and shut down during August, but this year rates are expected to be cut back further than usual, outages are expected to be more widespread, and their duration is expected to be longer.

Small- and mid-sized car production has also been limited by poor macroeconomic conditions, but not as severely as the fibre market.

Premium automotive demand, however, has so far been unaffected by the downturn in the wider economy because of strong exports to Asia resulting from upward social mobility.

“The final end-use is the reason we’re still running at higher rates,” a polyamide chain producer said.

Automotive demand has been falling at a slower rate than fibre consumption, but some players expect vehicle production from small-to-premium to fall sharply in the mid-term. They see the lag between fibre and automotive production because of the lengthier consumer decision making process.

“Fibre is a classical, typical, commodity. If you need socks you decide in 30 seconds, even four or five pairs. In the case of the car, the lead time’s longer,” a polyamide chain producer said.

Because of weak demand, ADA operating rates have already been reduced to below 80% of capacity, the majority of players said this week.

Capro operating rates are also being cut back, although utilisation levels are more varied, with rates in a wide range of 50-90% of capacity. The highest operating rates represent those that are connected to the premium automotive industry. 

“We’re fearful of benzene. With prices going up it makes sense to lower inventories. From our perspective, Asia and automotive demand have stabilised... the fear comes from uncertainty on raw materials and intermediates,” a nylon producer said.

There is concern throughout the polyamide chain that if raw material costs rise further demand will not support significant increases downstream, and production rate cuts and outages will become more pronounced.

“Summer shutdowns have already begun... in one or two weeks we’ll see many more closures. It’s dictated by low margins,” a nylon buyer said.

Since July 2011, ADA contract prices have fallen by €400/tonne, capro contract prices by €140-180/tonne, nylon 6 contract prices by €380-420/tonne, and nylon 6,6 contract prices by €150-250/tonne. In the same period, benzene prices have risen by €199/tonne.

“It’s not getting easier, especially if you look at benzene, a caprolactam buyer said.

“There’s no reason for it... I think capro margins are not good – we’re not seeing the level of adder we has before – the whole world’s different to two or three years ago. People say the happy days for capro are over. Benzene is only one part of the story.”

July capro, nylon 6,6, and ADA contract negotiations are ongoing, polarised by arguments on both sides of the market over the need to restore profitability.

ADA July price targets are being reconsidered in light of rising benzene spot prices.

Capro buyers are targeting July price reductions of €100-120/tonne because of weak demand and squeezed margins downstream. Buyers argue that a reduction of less than the €100/tonne drop in July nylon 6 contract prices would force them to cut operating rates or shut down plants.

“Demand is low. I expect a decrease [in contract prices]. Demand is low, if capro doesn’t go down you have to think about ‘do I decrease production rates’,” a capro buyer said.

Producers are aiming to limit contract price falls to no more than the upstream benzene July contract price drop of €68/tonne, with some suppliers aiming for a rollover in July capro contracts compared with June. Producers argue that their own margins are tightly squeezed and that they will need to cut operating rates if prices fall by more than the benzene reduction.

One nylon producer already has a contingency plan in place to reduce operating rates to 40-50% of capacity if reductions in nylon 6 prices are not mirrored in feedstock capro July contracts.

“Demand has not substantial improved. It’s still a situation which is unsustainable,” a polyamide chain producer said.

Raw material cost volatility, weak demand, and uncertainty continue to dominate polyamide chain discussions. No cream can reverse the effects.

($1 = €0.81)

By: Mark Victory
+44 208 652 3214

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