Markets bear brunt of economic malaise

12 October 2012 09:38  [Source: ICB]

Amid the economic maelstrom plagueing petrochemical markets globally, the adhesives and sealants sector has been subject to pricing volatility and supply issues over the past year. Nevertheless, the outlook remains largely positive.

Shoes Rex Features

 Rex Features

Pure methyl di-p-phenylene isocyanate (MDI) mainly finds outlets in the sealants, coatings and adhesives industries and is used in a wide range of downstream sectors such as footwear, food packaging and automotive.

In Europe, pure MDI demand into the main footwear industry was lower than expected at the end of 2011 because of heightened economic uncertainty and the knock-on effect of softness in the main Asian pure MDI and footwear markets. As a result, European pure MDI prices were under downward pressure. Pure MDI use in the footwear sector typically rises at the end of the year and start of the next.

SIGNS OF LIFE?

In early 2012, there was some seasonal pick-up for pure MDI in the downstream footwear sector. This, in combination with some reduced MDI output and firmer upstream costs, pushed European pure MDI prices in the first few months of 2012.

During the second and third quarters of 2012, pure MDI prices stabilised between €2,130-2,200/tonne ($2,754-2,844/tonne) FD (free delivered) NWE (Northwest Europe), because high upstream costs and some production constraints were offset by seasonally low demand for footwear applications at the time.

Similar to the footwear sector, European pure MDI usage in the automotive industry has also been subject to some fluctuation in demand over the last year - albeit more related to soft economic conditions rather than seasonal factors.

Pure MDI can be used as a thermoplastic polyurethane (TPU) resin, which finds outlets in a wide selection of downstream sectors such in car instrument panels - although it is rather a niche application when contrasted with the main PU car application, which is car seating.

European car production is estimated to be down by 7-8% for the full year of 2012 versus the same period in 2011, but could be down as much as 20% in the Mediterranean, according to one main PU manufacturer.

This reduction in demand is attributed to intensified economic concerns both within Europe and outside the region.

Pure MDI into TPUs are also employed in cabling and electronic devices, and they provide binding for the parts as well as electronic insulation for cabling. Demand in these outlets have been fairly resilient to the recession.

Pure MDI can also be used as a coating and adhesive in the food packaging industry and demand in this sector has held up reasonably well, as its everyday usage is offsetting to some extent the underlying economic constraints in Europe.

The North American PU adhesives and sealants market is stable, despite concerns over reduced demand. Participants have reduced inventories and remain cautious, but demand is seasonally strong in the construction sector. Expectations for the fourth quarter are mixed, with the perception that demand may see slight declines but remain on par with third quarter. Pure MDI prices have largely tracked upstream benzene developments over the past year.

In Asia, MDI supply has been tight because of production hiccups at a major Chinese facility and reduced operating rates at regional facilities in Japan and South Korea. The tightened supply has helped to bolster MDI prices in spite of tepid demand. China's MDI demand has slowed year on year because of weaker Chinese confidence.

The general demand outlook for the adhesives and sealants sectors is generally positive for 2013, with some growth potential in the emerging energy markets such as a an adhesive in wind blades and solar panels, according to information from the Adhesives and Sealants Council (ASC) in the US.

Another innovative use of PU is BASF's 100% PU content refrigerator, known as "the coolpure 1.0 concept refrigerator", which ensures optimised insulation through the innovative usage of PU foam as an adhesive, enabling the vacuum-insulated panels (VIPs) to be attached to the inner walls of the fridge or freezer doors and not only to level surfaces, according to the company. BASF is in the process of commercialising this material.

EPOXY SLOWDOWN

The US epoxy resins market is approaching its seasonal slowdown. With construction and manufacturing activity starting to lag, demand from the sealants and adhesives markets has also started to wane. US producers have faced consistent pressure from Asian material, but this could start to fade as higher European prices move material away from the US.

Another factor that could push up US prices in the fourth quarter is the rise of feedstock benzene, which remains strong despite weaker downstream demand. US producers have struggled to pass down higher feedstock costs because of the high volume of Asian material.

In Asia, demand was weak as most buyers purchased cargoes on a need-to basis in September despite it typically being a period when buying activity picks up ahead of the year-end holidays and festive season in the US and Europe.

Demand is expected to stay flat until the end of the year as its consumption by the downstream electronic, adhesives and paint coatings markets is expected to remain soft, sources said.

Despite prevailing weak demand, some market participants expect liquid epoxy resin (LER) prices to firm in the fourth quarter on rising feedstock bisphenol-A (BPA) and epichlorohydrin (ECH) prices. However, other factors that may affect prices include unexpected changes in supply, and in the global economy, which will be largely dependent on the recovery in the US and the eurozone debt crisis.

In Europe, demand is described as bullish by most producers, with order books full and plants running at above-average rates. Sellers add that the market is not long any more and if demand picks up during the fourth quarter, shortages are possible. This was contradicted by buyers, who say demand is weaker than expected and the fourth quarter will bring a slowdown. Consumers do not think demand will improve during the last quarter as most downstream markets wind down in November and December.

Demand from the adhesives and sealants sector is surprisingly good, according to two epoxy buyers that supply this sector. One says its sales have gone up about 10-15% since last year, and the other describes this sector as the "only downstream sector from epoxies that perform well". However, both the construction and automotive industries are performing below expectation as construction output has dropped and auto sales have fallen significantly in 2012.

Prices are unlikely to increase during the rest of the year unless feedstock costs shoot up drastically, sources note.

DEMAND DISAPPOINTS IN ADHESIVES AND SEALANTS

The prices of acrylic acid (AA) and acrylate esters in Asia have been on a steady climb, tracking Chinese domestic prices. However, demand remains weak, as buying sentiment has dampened because of the ongoing eurozone crisis and slower growth in economies.

Buyers were on a cautious stance during this year, unwilling to build up inventory level in an uncertain market. Moreover, buyers cite weak downstream demand in the adhesives and sealants sectors, with customers only purchasing on a hand-to-mouth basis.

In contrast, regional producers have been increasing offer prices on higher feedstock and production costs, in addition to firmer prices in China.

Southeast Asia demand remains weak, as some producers turn their focus to the China market as they were able to sell at higher levels.

In Europe, propylene derivatives AA and acrylate esters have seen prices see-saw this year, driven by feedstock costs. Producers have been looking for recognition of the impact of raw material price increases on production costs, and will endeavour to achieve price rises in October.

Feedstock contract prices largely increased in the first quarter, with both propylene and acetone reaching record highs in April. European propylene contract prices for July fell by €170/tonne ($220/tonne) to €935/tonne FD (free delivered) NWE (Northwest Europe), marking a record-high adjustment since monthly contracts began in January 2009.

Sentiment in the adhesives and sealants sector has been softened by the challanging economic conditions, and this has resulted in more moderate increases for the balanced-to-long AA and acrylate esters sector. Attention turned to Asian markets following an explosion at Japanese company Nippon Shokubai's Himeji facility.

European players said the market felt busier but added that it was too early to assess the impact of the explosion on Europe, adding that any impact would only become clear later in October.

The US acrylic acid and acrylate esters market remained quiet heading into the fourth quarter on soft fundamentals including flat demand, ample supply and weak upstream values.

US contract prices were flat in August and September and appeared likely to roll over again for October, given only marginal corresponding changes in primary feedstock chemical-grade propylene (CGP), and some end-of-year demand weakness.

That relative calm contrasts sharply with the precipitous drops of 7-8 cents/lb and 10 cents/lb in acrylates contract prices for June and July, respectively.

Those drops stemmed from a 25.50 cent/lb drop in CGP during May and June.


Author: Heidi Finch, Janos Gal and Helena Strathearn



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