FocusBD and SBR are in freefall, but the arbitrage play is on SBR

11 July 2013 16:42  [Source: ICIS news]

BD and SBR are in freefall, but the arb play is on SBRBy Mark Yost

HOUSTON (ICIS)--Call it a tale of two petrochemicals.

Styrene-butadiene-rubber (SBR) and butadiene (BD) have both seen the bottom fall out of their respective markets over the past year, mainly because of a global downturn in the replacement-tyre market.

The spot price for US BD has dropped by 41% over the past year, from 97.5 cents/lb ($2,149/tonne, €1,676/tonne) to 57.5 cents/lb today. Similarly, the average spot price for SBR 1502 has fallen nearly 23% from 113.5 cents/lb a year ago to 87.5 cents/lb today.

But when it comes to arbitraging spot material, the clear winner is European SBR moving to the US, sources said. Here is why:

While Asian and European spot BD are priced below or on par with US BD, the key is shipping. It costs about $150/tonne to bring SBR to the US from Europe or Asia, whereas the cost of shipping BD, which must be climate-controlled, is about $350/tonne, market sources said. So based on shipping prices, the smart play is for SBR.

Where are US SBR users getting their imported material? According to market sources, the cheapest material is coming from Europe. That is in line with an ICIS assessment of global SBR 1502 prices.

US domestic spot SBR is assessed this week at about 77.5 cents/lb. Asian material, when shipping is factored in, is more expensive at about 85 cents/lb US FOB (free on board), while European SBR can be delivered to the US for about 72 cents/lb US FOB, or about 5 cents less than the US domestic spot average.

US SBR costs more, sources said, because US BD prices are still too high.

The July contract price for US BD is 66 cents/lb, down by 8 cents/lb from the June contract price of 74 cents/lb and down nearly 20 cents/lb from the April price of 84 cents/lb.

BD spot prices in the US are currently assessed at 56-60 cents/lb, about equal to the Asian BD spot price of 56 cents/lb US FOB, but above the European spot price of 51 cents/lb US FOB. Some market sources said that they have purchased spot BD abroad in the 45 cents/lb range, but with the higher shipping costs, US customers are importing European SBR, not BD.

All of this has led US BD customers -- including SBR producers -- to push US producers to cut the August BD contract price by another 8 cents/lb to 58 cents/lb, sources said.

But even that may not be enough to make US BD (and SBR) competitive in a global market. That is because continued weakness in the replacement-tyre market, which uses about 80% of the SBR produced in the US, continues to push down prices for both BD and SBR. Some market sources said that they expect the US BD contract price for September to be in the high-40s. Spot material, they said, would have to be priced about 45 cents/lb, but by then European material may be in the low-40s or even high 30s. So it is a downward spiralling cycle with US producers forever playing catch up.  

The long-term outlook does not get much better. Market sources noted that expectations for a recovery in the global tyre market keep getting pushed further out.

Earlier this year, the expectation was that demand for replacement tyres would improve in the second half of 2013. Then, market sources said it would be first quarter 2014 before the tyre market recovered. Now, the view is sometime in the first half of 2014, if then.

"I've stopped trying to guess," said one market source. "The truth is, no one knows, and the macroeconomic fundamentals that would be needed to turn around that market aren't looking good."

US producers of BD include ExxonMobil, LyondellBasell, Shell and TPC Group. SBR producers include Ashland, Rhodia and tyre makers such as Goodyear and Michelin.

($1 = €0.78)

By: Mark Yost
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