Price and market trends: Asian imports put Europe epoxy players at risk

08 November 2013 10:00  [Source: ICB]

South Korean free trade agreement boosts imports while poor economy weighs on demand

The European epoxy resins market is in the doldrums, blighted by structural overcapacity and weak demand as economic malaise, particularly in the construction sector, continues to grip the region.

 South Korea's cheaper imports flood the market

Copyright: Rex Features

The situation has been made worse by volatile foreign exchange moves that have seen the euro significantly strengthen against the US dollar, putting strain on exports and opening an arbitration window for cheap imports from southeast Asia.

These cheap imports have been particularly pronounced from South Korea, which enjoys a free trade agreement with the EU, and whose exports are subject to almost no import duties.

This situation of steep competition and thin margins has been further compounded by price volatility in feedstocks earlier in the year as oil speculation over Middle East conflict loomed over the market.

Although the situation has eased somewhat in the last month, some producers are still being affected by contracts signed earlier in the year.

The result is that European epoxy producers, especially the ones not producing their own feedstock, are on the ropes and struggling to compete.

PRODUCT OVERSUPPLY
A UK distributor of Asian material said the material coming in from Asia must be making 4-5% purely on foreign exchange gains. Nevertheless, concerned about the state of European producers, it asked: “How long can you keep running a plant before it becomes more economical to shut it down?”

The distributor estimated that global supply of epoxy resins stands at about 3.2m-3.3m tonnes/year, but demand only stands at 2.3m-2.4m tonnes/year. “The market probably needs to lose a global player,” it said, a view shared by several market sources.

A European producer said that South Korean epoxy and feedstock producers are taking market share in Europe from domestic producers. “Volumes [from South Korea] are increasing very rapidly. Everybody in the industry agrees it is too quickly, too aggressive. It’s influencing our sales more than changes in demand.

“Looking ahead, everyone will try to get some of market share back. That means further decreasing margins and margins currently are horrible.”

Another producer, based in the Middle East, said there is huge oversupply in the European spot market coming from South Korea and Taiwan, “flooding the market with strange prices”. It said the epoxy price is currently too low and so it has had to turn away business, including business from some of its biggest customers.

The producer said it turned away 2,000 tonnes of business in October alone. “I think it will be disastrous between now and Christmas,” it added.

“I don’t know a single epoxy producer making a profit at the moment. Korean free trade has destroyed the European recovery. It’s like a ravenous tiger in the house. The next three months will be more of the same,” it added.

BUYER CONCERNS
Buyers are also aware of the situation and are concerned about the potential effects on the market, even if many are benefitting from the low prices.

Some think these cheap imports will only be a temporary force in the market and so continue to buy through their established relationships with producers for fear of losing discounts and rebates.

“I’ve had offers from people [sellers] looking around, I decided to stay where I am at the moment. It’s not the time to take risk. If the market picks up next year, and you buy on the cheap spot market at the moment, you’ll have issue when spot dries up. If you return to suppliers as a new customer you’ll lose your old discounts,” said a northwest European buyer severing the coatings market.

An Italian buyer said that due to all the excess material coming in from South Korea, it expects a fundamentally different market in 2014 with fewer European producers. “We think there are players that are suffering a lot.”

European producers, however, now appear unwilling to just passively watch anymore and are looking to fight on a price basis. Others are heard to be considering shutting down operations.

A UK buyer said: “Supply is outstripping demand, the big boys are trying to stimulate demand by threatening to close plants, but no one has done it yet. It [the market] needs a big plant to shut down.”

The buyer expects prices to remain at current levels for at least the next six months. “We don’t see the situation getting any better. October was abysmal. There is still a lot of nervousness out there.”

There are however signs that the situation is easing and many market sources are cautiously optimistic that 2014 will be better than 2013, if only slightly.

Furthermore, tensions in the Middle East are subsiding, easing price volatility, and resolution of the US debt crisis looks more tangible, reducing foreign exchange fluctuations and offering some respite to the beleaguered margins of European producers.

The outlook in Europe is also improving and the green shoots of economic recovery are being seen in northwest Europe, particularly the Netherlands, the UK and Germany, offering some comfort to market participants.


By: Iain Packham
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