ACC CPI: Isocyanate investments overshadow the market

21 September 2012 10:52  [Source: ICB]

Europe's polyurethane markets improved in the first half of 2012, but there are still issues surrounding new capacity and ongoing restructuring to be tackled

Europe's polyurethane (PU) producers are striving to improve profitability and pass higher costs of raw materials down the value chain to ensure the sustainability of the industry and achieve re-investment economics. They are hoping that some market restructuring and the EU regulatory drive to boost energy efficiency in the main downstream markets of construction and automotive will stand the European market in good stead for the future.


Exports of top-of-the-range automobiles from European manufacturers to Asia are helping support EU polyurethanes demand

Flickr: SantaRosa

Their efforts have been successful, to an extent. European crude methyl di-p-phenylene isocyanate (MDI) prices increased by €180-200 /tonne ($226-252/tonne) between February and May 2012, taking prices to more than €2,000/tonne FD NWE. The rise was driven by high upstream costs and the need for margin recovery.

This was despite the usual low seasonal activity in the important construction sector, which had been offset to some extent by the relatively mild winter weather earlier in the year, some MDI output limitations and stock replenishment following de-stocking activity at the end of 2011.

However, MDI prices were relatively steady in June and into the third quarter of 2012, despite heightened volatility in the upstream benzene market. Sellers' attempts to recoup lost margins and raise prices in view of high upstream costs met with little success, as demand in the construction sector, although reasonable, was not as healthy as seasonally expected during the second and third quarters, affected by the soft macroeconomic conditions.

However, any economic related slowdown is being counter-balanced to some extent by stricter legislative requirements for insulation, in which PUs provide excellent performance requirements.

Views on European MDI consumption into the other major downstream market, the automotive sector, have been mixed, depending on vehicle size and region. Generally, export demand for larger premium vehicles has held up reasonably well so far during 2012, despite the economic uncertainty. By contrast, demand for smaller vehicles, particularly those manufactured in southern Europe, has been adversely affected by the economic crisis.

MDI demand into downstream appliance outlets, however, has been largely satisfactory and one MDI producer suggests that it has been slightly better than expected in the third quarter of 2012, when compared with the same period last year. It adds that this has helped to compensate to some extent for the lower-than-expected demand from the construction sector. However, this view is not widely held by others in the market.

The crude MDI market has been largely balanced in the first half of 2012, but this has been due to a number of output constraints, both planned and unplanned, which has helped to counter some underlying fragility in demand.

On the back of recent capacity additions in Europe and Asia, uncertainty over downstream demand, heightened upstream volatility and the ongoing need to achieve re-investment economics, there are no plans for new MDI capacity in Europe in the near future.

In 2011, Hungary's BorsodChem expanded its MDI M2 plant at Kazincbarcika from 150,000 to 240,000 tonnes/year. It remains unclear whether the unit has run at full rates since then for market and profitability reasons. In addition, the company's MDI M1 plant at the same Hungarian site has been idle since 2009, resulting from the economic crisis and dampening effect on demand at the time.

As part of its restructuring plans, Germany's Bayer MaterialScience intends to convert its 125,000 tonne/year toluene di-isocyanate (TDI) plant in Brunsbuettel in Germany into a 220,000 tonne/year MDI facility. This fits in with its main restructuring and expansion plans for TDI, which involve the construction of a 300,000 tonne/year worldscale TDI plant at Dormagen, Germany, which will replace the existing TDI plant and a pilot plant on the site with combined capacities of 90,000 tonnes/year. The new facility in Dormagen is expected to come onstream in 2014.

BASF also has TDI expansion plans for 2014 in the form of a new 300,000 tonnes/year TDI facility in Ludwigshafen, Germany, which is expected to replace its existing 80,000 tonne/year TDI facility at Schwarzheide, Germany. These expansion plans are driven by growth forecasts for the Middle East, Africa and central Europe, which are estimated to range between 3-7%/year over the next five to eight years, according to European TDI manufacturers. 

Some market players, however, question whether the new TDI capacities planned for Germany in 2014 will be sufficiently absorbed into the European market. This is taking into account the more mature Northwest European TDI market, which is expected to move only in line with growth in gross domestic product, as well as recent and forthcoming capacity expansions in other parts of Europe and the Middle East.

One European isocyanate and polyol producer explains that it is very difficult to invest in new capacities in Northwest Europe and considers it more attractive to invest in the Middle East because of the potential to benefit from local supplies of lower cost feedstocks. It also believes that there is more demand growth potential in the Middle East and surrounding area, in contrast to the more mature Northwest European market. The Middle East is also well-positioned to export to Europe and Asia.

Looking to the Middle East, Sadara Chemical, the Dow Chemical/Saudi Aramco joint venture at Al Jubail in Saudi Arabia, will include production of isocyanates and polyols among other products. These units are expected to come onstream in the second half of 2015 and 2016 and will be intended to serve domestic demand, which some say questions the feasibility of the new TDI plans for Europe, which will also be used to export product to these regions.

Saudi Arabia's SABIC is also planning to move into MDI and TDI production in Al Jubail in 2016, using technology licensed from Japan's Mitsui Chemicals. Capacities have not been revealed.

The TDI expansion plans for Germany in 2014 also raise the question about where the additional polyols capacity in Europe will come from. This is particularly pertinent given that flexible foam production is based on two parts polyols and one part TDI.

Poland's PCC Rokita has added a fourth production line in April 2012 at Brzeg Dolny in Poland, which has raised its nameplate capacity from 70,000 to 100,000 tonnes/year. However, this will certainly not be enough to match the needs for the two new worldscale German TDI plants and more polyols capacity will be needed in Europe.

Crucial factors for the success of the expansion plans for TDI and flexible polyol are the economic situation and how demand will develop. TDI prices dropped significantly in the second half of 2011 on slower demand despite high toluene costs. European TDI prices did, however, recoup some margin losses in the first five months of 2012, with prices either side of €2,200/tonne FD NWE. The upward pressure was attributed to market tightness resulting from a spate of production constraints in the first half of the year. Sellers, however, say that there is still an underlying need to restore profitability amid ongoing high toluene feedstock costs.

Slabstock conventional flexible polyol prices moved up during the first four months of the year, driven by higher upstream propylene costs, but have seen a mix of stable-to-softer values between May and August, which took flexible polyol prices to either side of €1,800/tonne FD NWE in August. This followed some relief in upstream propylene costs, with the exception of August, and plentiful supply for flexible polyols, which resulted from slower summer demand and good polyol output.

Both polyol and MDI players have struggled to contend with heightened upstream volatility for benzene and propylene respectively so far during 2012 - especially with the significant hike in benzene and propylene costs in August, which caught players unawares during the quieter summer holiday period.

Both MDI and polyol producers have been unable to pass on these higher costs downstream in August because of a number of player absences during the summer holidays and soft demand, which has eroded their margins. While TDI players have also been subject to high toluene costs, these have not fluctuated to the same magnitude as those for propylene and benzene.

While polyol and isocyanate players lament poor profitability, this is equally the case for downstream polyurethane foam producers, which said they had not sufficiently passed on isocyanate and polyol related price increases from earlier in the year amid fragile demand and therefore were in no position to take any further price increases.

Downstream demand for TDI and flexible polyols from the downstream bedding and furniture sectors slowed significantly in the second half of 2011 because of heightened economic uncertainty, which limited consumer spending. Demand has remained relatively stable in these downstream sectors during the first half of 2012, albeit at a low level, when compared with the pre-crisis period. There is some hope that demand will pick up in September/October, ahead of the next season in the downstream mattress and upholstery sectors, although this remains to be seen, depending on economic recovery.

For more information on ICIS pricing in the polyurethanes sector

By: Heidi Finch
+44 20 8652 3214

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