FocusChina’s phenol prices may stabilise on feedstock costs, supply cuts

24 October 2012 04:26  [Source: ICIS news]

By Trisha HuangPhenol settles flat

MELBOURNE (ICIS)--Spot prices of phenol in China may halt a decline in the near term because of strong feedstock benzene costs and tighter regional supply, said market sources on Wednesday.

Domestic phenol prices in China, the world’s largest importer, have fallen by 4% since late September, while the cost of feedstock benzene has gained by 6.5% to reach an average of $1,305/tonne FOB (free on board) Korea over the same period.

Domestic phenol prices were at yuan (CNY) 10,800/tonne ($1,728/tonne) ex-tank in eastern China as at the week ended 19 October compared with CNY11,200-11,300/tonne ex-tank for the week ended 28 September, according to Chemease, an ICIS service in China.

The decline in domestic phenol prices was hastened by a generally bearish market outlook that has prevailed since late September, ahead of the start-up of Shandong Lihuayi’s new phenol/acetone plant in Shandong province on 6 October.

The rapid domestic price decline also capped phenol importers’ buying ideas for spot cargoes at well below $1,400/tonne (€1,078/tonne) CFR (cost & freight) China, on a zero anti-dumping duties (ADDs) basis, while subject to 5.5% import duty.

Some importers added that they were unable to undertake any meaningful price negotiation with suppliers because their buying ideas were too far from selling ideas, estimated at the high-$1,400s/tonne to low-$1,500s/tonne CFR China (basis zero ADD, subject to duty).

Many market participants remained worried that domestic phenol prices in China may plummet in response to the earlier-than-expected commissioning of Shandong Lihuayi’s plant, in a repeat of the market collapse that followed the end-April 2012 start-up of Shiyou Chemical’s phenol/acetone plant at Yangzhou in Jiangsu province.

The commissioning of Shiyou Chemical’s phenol/acetone plant spurred a 17% slump in phenol prices in seven weeks to $1,265/tonne CFR China (basis zero ADD, subject to duty) for the week ended 15 June, according to data compiled by ICIS.

However, some market participants pointed out that the current market situation differs significantly from April/May, because phenol margins are under greater pressure from persistently high benzene costs, whereas comparatively lower benzene prices in May gave phenol/acetone makers room to cut prices. 

Phenol was priced at $342.50/tonne higher than benzene on 27 April, ICIS data showed.

The price difference between phenol and benzene narrowed to $125/tonne by 19 October, ICIS data showed.

“Currently, the biggest problem we’re facing is the continuing rise in the cost of benzene,” said a Taiwanese phenol producer.  

“The severe margin squeeze means that we as producers are left with few options except to cut output, because we can’t afford to sell to China at a price that is acceptable to the buyers,” the producer added.

While production costs differ among producers, phenol/acetone makers in South Korea and Taiwan have maintained minimum selling ideas at $1,400-1,410/tonne FOB Korea/Taiwan.

The margin squeeze currently experienced by producers has been underscored by two Asian phenol makers’ prompt decision to cut output in October and November, which is expected to contribute to a further tightening in supply.

Japan’s Mitsui Chemicals plans to cut its phenol/acetone contractual supply to China by as much as 50% during the fourth quarter, a company official said on 23 October.

The company plans to cut its phenol/acetone contractual shipments to China by about 30,000 tonnes in the fourth quarter, compared with its typical supply volume of 50,000-60,000 tonnes/quarter, following an announcement that it will reduce its Osaka output in November.

“The decision to cut output and shipments was prompted by the weak margins we are currently observing,” the official said.

Mitsui Chemicals will slash its phenol/acetone output at its Osaka plant to 70% capacity in November, from 100% capacity currently.

Taiwan Prosperity Chemical Corp (TPCC) plans to cap its Kaohsiung phenol/acetone plant operating rate at 90% in November in view of the ongoing margin squeeze.

Similar actions were taken by TPCC in October because of the comparatively high benzene costs and subdued demand from China.

Supply of spot cargoes has already been curtailed by concentrated plant maintenance in China, Japan, South Korea and Taiwan in September and October.

“The market lacks confidence,” said a separate Taiwanese phenol maker.

“The buyers in China are being very cautious in their procurement decisions, which is understandable in view of the losses they incurred as a result of the market downturn earlier this year,” the phenol maker added, referring to the price slumped that followed Shiyou Chemical’s start up.

In light of weak Chinese buying interest and in a bid to protect their margins, regional producers have sought outlets that would accept prices at the low-$1,400s/tonne FOB Korea/Taiwan, including India and the Middle East.

Intensifying price competition among local suppliers, in the wake of Shandong Lihuayi’s start up, has prompted major Chinese producer Sinopec to implement successive price reductions in October.

Major Chinese producer Sinopec Shanghai Gaoqiao on 24 October implemented a third consecutive price cut for October. It reduced its phenol price by a further CNY100/tonne to CNY10,800/tonne EXW (ex-works).

Still, some Chinese importers said that they believe the domestic phenol price slide is largely driven by a bearish market sentiment as they do not believe that local producers can afford to cut prices further, as production economics have entered the negative territory.

“What we need to do now is to restore confidence to the market,” a Chinese importer said.

In 2011, China purchased about 760,000 tonnes of phenol, chiefly from Europe, Taiwan, South Korea and the US.

Additional reporting by Jenny Yi

($1 = €0.77 / $1 = CNY6.25)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By: Trisha Huang

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