Price and market trends: US phenolics chain faces pressure

22 February 2013 10:19  [Source: ICB]

Producers face high benzene feedstock costs on one side and higher competition from abroad on the other

The biggest takeaway from a recent US phenol-acetone conference was that producers in the phenolics chain have very little control.

"Phenol producers are losing business," a producer said. "Prices are too high, but there's nothing we can do about it."

 The US housing recovery could drive phenol demand

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The recent trend of record-high US benzene has been the biggest source of damage to the US phenolics chain. The US benzene contract settled at a record high in November and December of 2012 and January 2013. Prices came down slightly in February, but sources expect a rebound in March and high prices through the first half of the year.

"Nobody makes benzene on purpose," a consultant said. "If you look at where we get benzene from, it's all from sources that are giving us less."

LOWER REFINERY RATES
The consultant said US crackers' focus on lighter feeds has taken away benzene, as have lower operating rates at US refineries because of weaker gasoline demand.

The third major source of benzene supply tightness has been the result of weak polyester demand creating weak demand for paraxylene which in turn has pushed toluene disproportionation operating rates down. This has resulted in high benzene eroding margins for US phenol, leading to lower operating rates.

"If you're a phenol consumer, you have to be watching benzene," the consultant said. "But it's going to be difficult to get away from the benzene-based pricing structure."

Sources say that contract premiums for domestic phenol over benzene fell by 3 cents/lb on average in 2013 compared with 2012

The spot market has seen an even bigger fall, owing to another key factor the US phenolics chain hasn't had any control over - new Asian capacity.

Since the start of 2012, Asia has announced plans to build almost 2.95m tonnes/year of new phenol capacity to satisfy growing demand.

EXPORTS TO ASIA FALL
With 420,000 tonnes/year already started since the beginning of 2012, the region has imported less US phenol, driving premiums down.

Additionally, LG Chem is close to starting up its 300,000 tonne/year Daesan phenol plant in South Korea.

US premiums on spot phenol have fallen to 1-3 cents/lb in February, according to ICIS data, compared with premiums of 15 cents/lb at the end of 2011.

With premiums on phenol slipping, higher costs are hurting downstream markets.

Several phenol buyers say demand for phenolic resins is hurting because of higher prices, and because overseas imports are starting to take some of their market share in South America.

"We are seeing more competition in nylon, BPA [bisphenol A], and surprisingly, phenolic resins," another consultant said. "MDI [methylene diphenyl diisocyanate] is also becoming a major threat to phenol in wood resins, mostly from cost pressure."

The higher phenol prices have also eroded margins for US epoxy resins producers, which have struggled to move prices higher amid competition from Asia.

"The Asians are desperate to sell," an epoxy resins buyer said. "And they are basing their prices on cheaper benzene."

The US domestic market for phenol derivatives is closely tied to the US housing sector, which has seen a stop-and-start recovery in 2012 and 2013.

However, sources expressed concerns that even if domestic demand increases, cheaper imports could take some of the market, especially in South America.

The weaker demand for phenol has pushed operating rates lower, creating supply tightness in the co-product acetone market.

"Everyone and their brother is looking for acetone," a trader said. "But you can't find it anywhere."

As a result of the weaker phenol premiums, producers have looked to increase premiums on acetone over its key feedstock, refinery-grade propylene (RGP).

VOLATILITE RGP PRICES
However, US RGP prices have been volatile in 2012 and 2013, and have been rising this year on tight supply. According to ICIS data, US RGP prices averaged 50.90 cents/lb in 2012 and have averaged 68.94 cents/lb in 2013.

The supply tightness and price volatility has been the result of a combination of factors, but mostly because of lighter feeds being the main feedstock for US crackers.

"It's too early to tell if these PDH (propane dehydrogenation) units will save propylene prices in the US," another consultant said. "There will be competition for the cheaper products."

The lack of control for phenol-acetone producers to affect benzene and RGP pricing has made for price volatility, which some sources have said is more damaging than high prices.

"I just wish we could count on something for a few months," a phenol buyer said. "When everything is up and down like this, you can't plan for anything.


By: John Dietrich
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