INSIGHT: Prices will slip in lower cost oil, weak demand environment

10 May 2013 16:03  [Source: ICIS news]

By Nigel Davis

Butadiene rubbers are used as raw material for tyres for the automotive industry.LONDON (ICIS)--Rubber and specialties producer LANXESS had stuck with its price-before-volume strategy since it was spun off from Bayer back in 2004 but in the first quarter it had to give way to customers.

Quite rightly, this has worried investment analysts.

Does it mark the beginning of a slip away from price discipline for the Germany-headquartered company?

Perhaps not, but it is certainly indicative of the current difficult operating environment and the pressure on producers to maintain the fine balance between output and demand they have managed so well for so long.

The problem is apparent in most petrochemical chains. Upstream cracker operators in Europe are running plants at low levels and there is more talk of price discounts. Downstream it was made clear earlier this week, when the proposed chlorvinyls joint venture between Solvay and INEOS was officially announced, that polyvinyl chloride demand was 30% below 2007 peak levels.

LANXESS on Wednesday showed how tricky it had been to hold on to prices in the face of weak demand in the tyre and other rubber markets.

“We believe that maintaining price discipline will be challenging for the foreseeable future,” analysts with Credit Suisse in London said. They noted that, for LANXESS, both volumes and pricing were eroding.

“This should lead to higher idle facility costs, which will offset any improvement in inventory,” they said. “More worryingly management has stepped away from its absolute price-before-volume strategy and given some reductions to customers.”

LANXESS’s sales in the first quarter were down 12.3% from a year ago. Volume demand from the rubber processing, automobile and construction industries fell. Lower volumes accounted for a sales fall of 6.4%.

Selling prices were off 5.5% as customers battled hard on prices given the fall in the company’s oil and naphtha-related feedstock costs.

The 18.5% drop in sales from the company’s Performance Polymers businesses was due mainly to selling prices, LANXESS said, with some of the price falls attributable to lower butadiene and other feedstock prices.

“This modulation of the price before volume strategy was due to the sharp drop in demand against a strong prior year quarter,” the company said. Performance Polymers businesses include butyl rubber and ‘performance butadiene rubber’ alongside elastomer business units. Segment  earnings before interest, tax, depreciation and amortisation (EBITDA) in the quarter were down 56.1%

Sales in the somewhat smaller Performance Chemicals reporting segment were down 6.8%, hit by Europe’s weak construction industry with segment EBITDA 38.6% lower.

“We are not immune to a sharp drop in demand, but we are responding to it proactively as always,” management board chairman Axel Heitmann said.

“At the start of the year, LANXESS already initiated temporary facility shutdowns in the Performance Polymers segment in line with its proven policy of flexible asset and cost management. Now additional measures are planned in the Performance Chemicals segment,” he added.

“These measures are not merely designed to achieve short-term savings. We aim to raise the competitiveness of our international sites in this segment for the medium and long term."

You can’t expect a company like LANXESS to willingly drop prices but the company’s first quarter outturn shows just how fragile the petrochemical industry’s hold on prices has become.

A weaker oil price, set against the weak performance of the global economy, must ring alarm bells in many boardrooms. The inability to hold on to prices in what at any stage could be a rapidly declining oil price environment is an eventuality all companies have to plan for.

LANXESS had been faced with the opposite dilemma for the primary feedstock for its Performance Polymers businesses, butadiene.

Prices had moved higher, not so long ago, much higher, on structural supply tightness driven by the global shift to cracking more ethane. This general tightness in butadiene is likely to persist although there are bound to be fluctuations, particularly if the oil price changes markedly.

Those firms able to make more butadiene are planning to do so. Austria-headquartered oil group OMV this week said it would extract more butadiene from C4s from two of its crackers in Europe. Hungary’s MOL said something similar in September last year so the investment in more butadiene extraction is becoming a trend.

However, more, possibly cheaper, feedstock does nothing when companies are trying to hold on to prices in a declining or challenged market environment.

As LANXESS said, global growth in automobile production was weak in the first quarter and demand for replacement tyres both for cars and for commercial vehicles was “very low”.

“Development was distinctly negative for the European auto industry at minus 12%, while the sector virtually stagnated in the US at minus 0.3%. Only China posted a very positive trends with 15% growth.”

LANXESS has been forced to cut its capital spending budget this year to trim cash outflows. The rest of the year is expected to remain difficult because of the lack of momentum in the global economy.

“Passing along raw material and energy price fluctuations to the market will remain a challenge in the current environment,” the company says.

($1 = €0.77)

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By: Nigel Davis
+44 20 8652 3214



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