GPCA: Challenging times for solvents

22 November 2012 16:25  [Source: ICB]

This year has seen a number of solvent traders and producers taken by surprise by a slowdown in the Middle East solvents market. Demand from downstream markets in early 2012 reduced following the uncertainty in the global economy, with traders holding unsold inventory for over six months.

Painting Rex Features

 Rex Features

The market was surprised by the 2012 slowdown

The year for solvents was much overshadowed by a needs-based approach to sourcing of product by buyers, with traders trying to off-load product at lower-than-cost prices to liquidate their cargoes.

The International Monetary Fund (IMF) presented a gloomy picture of the global economy at the IMF-World Bank Annual Meetings held in Tokyo this October, tracing weaker prospects for the year ahead for countries the world over. In its latest World Economic Outlook unveiled at the event, the IMF said that cutbacks in public spending and a relatively unsteady global financial system continue to weigh on growth prospects. The IMF has predicted global growth of the world economy at a sluggish 3.6% in 2013.

For the Middle East, the IMF foresees depressed trade activities, much like 2012, with a modest growth in gross domestic product (GDP) among most oil exporters across 2013 but overshadowed by a continued uncertainty within the region. This uncertainty is said to be largely impacted by the political and economic shifts brought on as a consequence to the Arab Spring and weak trade terms, as well as the stringent sanctions imposed by US on Iran.

Consequently, the outlook for the solvents market in the Middle East region for 2013 is, to a large degree, an extension of 2012. Discussions with a majority of buyers and traders within the region leads ICIS to understand that 2013 is likely to be a year dominated by caution and watchfulness. "[Next year] is slated to pose several challenges to solvent producers, traders and buyers world over, as the impact of the global slowdown on solvent trade is significant," says a chief trader and distributor for solvents in the Middle East region.

"The eurozone debt crisis is estimated to have a greater impact on the Middle East region than other regions because of the proximity to Europe," adds a solvents distributor from the United Arab Emirates (UAE). "Though there is not a lot of solvent inflow from the European market as such, sentiments are definitely not very upbeat," he notes.

The uncertainty in downstream user markets in the Middle East is stated to be driven by the global markets' sentiment. The eurozone debt crisis, lower growth numbers recorded in China and India, a continued fiscal consolidation with weak financial balance sheets in the US combined with a low confidence level across markets weigh on market sentiment for solvents, according to market participants.

"Economies in Europe, and the US, are on a slowdown. China and India, too, have reported lower growth numbers in 2012. The Middle East is not insulated from these markets and it is likely that growth in the [Middle East] solvents market is impacted by the slowdown in these economies," the trader/distributor adds.

According to a number of market players, companies will aim to consolidate their positions rather than target high growth numbers in 2013. However, despite sellers and buyers looking to adopt a wary approach, demand for solvents within the region is expected to remain steady over 2012, although purchases are more likely to be done in smaller lots rather than bulk.

Demand in the Middle East for isopropanol (IPA), acetone and ethyl acetate put together, is about 77,000 tonnes/year, according to the solvent market participants. Of this, IPA, which finds use in the coatings and inks sectors, has a total demand of 35,000 tonnes/year while the region's demand for acetone and ethyl acetate (etac) are 18,000 tonnes/year and 24,000 tonnes/year respectively.

While etac is used in the manufacture of surface coatings, flexible packaging, industrial solvents and inks, acetone is predominantly used as a solvent in the downstream coatings markets.

Though regional demand for solvents in 2013 is expected to remain steady over 2012, solvent traders and buyers in the region choose to adopt a defensive strategy, aiming to hold lean stocks given the relatively higher level of uncertainty regarding downstream demand. Consequently, buyers prefer to replenish their stocks more frequently than indulging in bulk purchases.

"Even though absolute demand numbers may remain steady over the year, one cannot take the risk of carrying higher stock levels of product that could well go unsold," explains a trader from the UAE, who plans to import only that much product that can be sold easily in the regional markets.

The Middle East's solvent requirements are met by a mix of regional production supported by imports from South Africa, China, Taiwan, South Korea, Singapore and India.

Although the Middle East is not likely to see any local addition in production of either IPA or acetone, newer capacities in northeast Asia are expected to have a considerable impact on the supply of solvents to the Middle East.

Solvent demand across Asia is expected to remain stable, and market players anticipate newer capacities for IPA and acetone in China and Northeast Asia could lead to an excess supply situation across markets.

According to ICIS data, capacity for IPA alone is likely to go up by 30-40% across Asia. With demand in Asia not expected to change in a big way, the additional product is likely to lead to a competitive pricing for the surplus product available for export to Middle East and South Asian markets.

"Overcapacities in China, Taiwan and [South] Korea could well lead to an excess of supply of IPA and acetone, leading to more aggressive pricing," believes a Northeast Asian producer and a regular exporter of solvents to the Middle East.

AN END TO IMPORTS?

The etac market in the Middle East is slated to see a dynamic shift with the start-up of Sipchem's 100,000 tonne/year facility in the second quarter of 2013. According to market sources, the facility is expected to satisfy the total demand of the region of 26,000 tonnes/year, in addition to meeting to a considerable extent international requirement as well.

"Asian [etac] producers who have invested in the region could lose out on sales with Sipchem's start of operations, needless to say, our business too" says a UAE-based trader who regularly imports etac into the region.

Sipchem's facility, with a nameplate capacity of 100,000 tonnes/year, could well pronounce an end to etac imports into the region. The region, which sources bulk of its etac requirements from China, and to a lesser extent from India, may see a price war among Asian exporters whose volumes are expected to take a hit in March 2013.

DISTRIBUTOR-BASED MODEL

Markets such are the Middle East are growing slower than expected, and it is envisaged that for firms to make money and sustain their businesses, they need to function very efficiently, with a broad product spread, according to key traders and buyers across the region.

With companies operating in uncertain times, producers look to operate through a partnership ventures through distributors stationed across the region.

"Allying with a distributor would mean a long-term trade partner and a selling arm of the producer who is able to mitigate the risk at the producer's end," says a trader and distributor based in Dubai, UAE.

For a producer, collaborating with a distributor would impart the key advantage of mitigating the risk of product inventory buildup at its end. The distributor is capable to purchase a fixed quantity every month, ensuring a sustained outflow of product.

For a distributor, the risk involved in the product stock-up is relatively lower and spread across products that the distributor trades in. Market participants expect distributors to play a crucial role in the coming year, amidst the regional uncertainty in demand.

Although every producer, trader and buyer is unsure about what 2013 holds in store, they are positive that there is no major downtrend in markets is likely. Market players also anticipate an improvement in the overall markets by the third quarter of 2013.


By: Veena Pathare
+65 6780 4327



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