OUTLOOK ’13: US phenol-acetone market hinging on benzene costs

27 December 2012 14:41  [Source: ICIS news]

HOUSTON (ICIS)--The US phenol-acetone market has several concerns for 2013, but the biggest remains upstream benzene costs staying at or near record levels.

“Benzene prices seem to get upwardly revised every week,” a downstream source said. “And they look as though they’re going to stay well into next year.”

US benzene prices reached record highs in August, November and December and could do so again in January 2013.

The record-high benzene prices have closed any arbitrage window on phenol into Asia and Europe, and have made material unattractive into Latin America.

“You can’t trade phenol right now,” a trader said. “It’s too expensive.”

Additionally, any spot trades that have been talked have seen premiums on phenol over benzene fall significantly.

At the start of 2012, spot phenol was assessed by ICIS at 5-10 cents/lb ($110-220/tonne, €84-167) above benzene. By the end of the year, spot phenol was trading between a 4 cent/lb discount to a 3 cent/lb premium.

Traders and producers are expecting the weak premiums to continue into 2013, as soft demand from Asia and continued high benzene keep buying interest low.

“Most producers can barely afford the benzene,” a trader said. “They’re asking for higher prices to cover it but aren’t finding any demand.”

Domestically, sources are mixed regarding demand in 2013.

Some producers have said that solid construction activity at the end of 2012 portends a good year in 2013, which would boost demand for phenolic resins and bisphenol A (BPA).

Downstream buyers have been less optimistic, citing high costs they cannot pass down to customers.

“MDI [methyl di-p-phenylene isocyanate] is a major threat to phenolic resins,” a source said. “If customers switch to it, they aren’t coming back.”

As a result of weaker domestic demand and cost concerns, sources said phenol contract premiums over benzene have fallen in 2012.

Most buyers and producers agreed that 2013 premiums are being done around 10-14 cents/lb, compared with 12-18 cents/lb in 2012.

“Premiums have been falling all year long,” a buyer said. “The producers don’t have the leverage of threatening to send pounds overseas.”

The lack of export volumes have pushed US producers to lower operating rates, with most estimates putting current US production levels in the low-70% range.

With low operating rates expected to continue into 2013, phenol supply will be balanced with demand levels.

However, co-product acetone, which represents about one-third of production at phenol-acetone plants, will likely be tight.

Because it is only one-third of production, the acetone market cannot set operating rates.

As a result, supply tightness could keep acetone margins strong over feedstock refinery-grade propylene (RGP).

Historically, large-buyer acetone has been done below RGP prices. However, this trend was reversed in June.

Phenol-acetone producers said acetone margins needed to improve to pick up the slack caused by phenol margins continuing to drop.

Since then, large-buyer acetone prices have remained above RGP prices, although the December 2012 settlement has not been reached.

“Acetone is carrying the burden as it never has before,” a producer said. “It’s been like this for six months and there’s no end in sight.”

With acetone prices remaining high relative to feedstock costs, there is some talk that imports from Asia could become attractive.

However, much of the industry speculated that could happen in 2012, and the lack of arbitrage on Asian material lowered total volumes moved into the US.

“It’s going to be a matter of, Is it attractive?” a buyer said. “There’s no reason to move it over here if you can’t save any money.”

Most traders said they do not expect much Asian acetone to make its way into the US, as operating rates in that region are also low, owing to weak demand.

US sources said demand should be steady to strong in 2013, and that tight supply will affect the medium and smaller buyers more than larger buyers.

“The big guys will get their material,” a distributor said. “How much is left over is going to be a big worry next year.”

If imports become a factor in the US, they are expected to affect the medium- and small-buyer markets.

This is because the gap between large-buyer contract settlements and ensuing discounts is expected to remain wide compared with the medium- and small-buyer contract settlements.

However, these deals are not expected to occur often, and will likely affect one region of the US distribution market more heavily than the rest.

Meanwhile, tight supply of acetone is expected to keep export volumes to a minimum, with most activity focused on Latin America, rather than Europe or Asia.

($1 = €0.76)

By: John Dietrich

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