High feedstocks, poor demand hit US phenol-acetone market

07 September 2012 15:40  [Source: ICB]

Phenol producer margins are being squeezed by higher benzene costs and on the demand side, relief is elusive

Poor demand and high feedstock costs continue to choke the US phenol market, and there appears to be little on the horizon that looks like a cure.

"Traditionally, the third quarter has been very strong for us, but it's not looking that way this year," a producer said. "That leaves us very concerned with how the fourth quarter will turn out."


High feedstock costs are squeezing margins for phenol producers

Copyright: Rex Features

Most of the problems in the US phenol market can be attributed to its weak margins over its main feedstock, benzene.

This is being exacerbated by weak end-use demand for phenol, which is used in a variety of construction coatings and multi-purpose plastics such as polycarbonate (PC).

"The biggest challenge in the US market has been that no one is making the level of return they're accustomed to," another producer said.

Throughout the summer, US benzene prices have been detached from one of their typical barometers, US crude oil futures.

From May, US crude oil futures have fallen by 7.1% through the week ended 24 August, tracking economic concerns in Europe and Asia, as well as improving supply.

However, US benzene spot prices have increased by 1.0%, while contract prices have moved higher by 9.3% through the week ended 24 August.

And the rise in benzene was not a steady one. Instead, spot prices spiked in July, above the $5.00/gal level for the first time, according to ICIS, and the August contract price reached a record high.

"I'm still disturbed it settled in record territory during troubling economic times," a buyer said. "The market is ugly, there's no other way to describe it."

While benzene has attacked phenol margins from the bottom, weak demand has done so from the top.

Domestically, many contracts are based on premiums over benzene. Most sources said those are at about 8-14 cents/lb ($176-309/tonne, €141-247/tonne) for domestic phenol.

However, multiple buyers have reported that they have been slightly successful in lowering their premiums from what they had at the start of year, by about 1-3 cents/lb, putting ICIS assessed phenol prices at 60-66 cents/lb FOB (free on board).

The bigger hit in demand has come from the export market. With new capacity and weak demand overseas, Asian spot prices have fallen, dragging down US values with them.

"It's been very difficult for a quite a while now to move product into Asia," a trader said. "I've heard deals that were done at just the benzene cost."

The result has been a decline in phenol exports, which were a major money-maker in 2010 and 2011, especially into Asia.

"The producers can't afford to budge off of 4-5 cents/lb over benzene," a trader said. "Buyers can't come off 1-2 cents/lb because their downstream customers can't support it."

With all the margin loss, producers have naturally cut down their operating rates, with sources saying most are in the 70-80% range.

This has tightened phenol supply to match the lacklustre demand, and co-product acetone has also tightened considerably.

"It's screwed up and no one knows what the real price is," a distributor said.

For the largest buyers of acetone, who are mostly methyl methacrylate (MMA) producers - which goes into a variety of indoor and outdoor coatings, as well as LCD lights - premiums on acetone over its key feedstock, refinery-grade propylene, have been pushed up.

Starting with the July large-buyer acetone contract, acetone has been at a premium of 7-8 cents/lb to RGP, with the August contract expected to settle at 45.5 cents/lb DEL barges (delivered via barges).

Typically, the large-buyer acetone contract has been at a slight discount to spot RGP prices.

"We've had to make up our losses on the phenol side through acetone," a producer said. "And we're going to have to continue until phenol picks up."

Another concern has been the supply tightness, caused by the lower-than-normal operating rates.

Demand for acetone from the large and medium buyers has been slightly stronger year on year.

However, because most phenol-acetone units produce phenol at a roughly 2-to-1 ratio to acetone, the stronger demand for acetone has not been able to stem the tide of lower operating rates, tightening supply considerably.

"There's barely any material on the market," a trader said. "And even if there were, there wouldn't be any deals. Everyone is being turned down."

US phenol-acetone producers include Dow Chemical, Georgia Gulf, Haverhill Chemical, Honeywell, INEOS Phenol, SABIC Innovative Plastics and Shell Chemical.

By: John Dietrich

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