By John Richardson
BUTADIENE is an extreme example of what my fellow blogger Paul Hodges described yesterday as happening across several major petrochemicals markets.
Panicky buyers have, just as they did last year, “bought forward” in the hope that by so doing they will hedge against even higher feedstock costs in the future.
But this is an exceptionally risky strategy for any feedstock, given all the economic uncertainties – and in the case of butadiene, you really are putting your neck on the line: In H2 last year, prices collapsed on affordability issues.
And again, the signs are there following butadiene’s rally since the start of the Western New Year. A European trader told ICIS late last week that the “whole market could (again) collapse”, as Asian prices for the week ending 17 February retreated by $50/tonne.
Helen Yan, who covers the Asian butadiene market for ICIS, wrote last week:
“ ’The market is full of offers and this [has worsened the] bearish sentiment’, a major regional trader said. China’s port inventory reached a historic high of over 750KT, with increased import volumes arriving from all over the world.
“This is almost exceeding China’s maximum storage capacity of around 800,000 tonnes. Butadiene prices are higher than BR and this is not sustainable,’ another synthetic rubber producer said.”
Butadiene prices are down on operating rate cuts in butanediol and synthetic rubber. This followed what was described as “panic buying” of raw materials by butadeniol producers in China.
Historically, as we can see from the chart below, the volatility in butadiene pricing has greatly increased as a result of lack of sufficient capacity because most of the recent, new steam cracking capacity has been based on ethane feedstock. When any market is tight, pricing tends to be extremely volatile as buyers overstock and then run on inventories for several months.
On this occasion, buying forward seems to have also been driven by the belief that Chinese demand for all butadiene derivatives is set to enjoy a strong rebound in 2012.
But as we have discussed before, the outlook for the Chinese economy is at best uncertain.
The issues affecting butadiene end-users are, of course, broadly the same as those for polyolefin buyers.
Financial markets, including the oil market, play a big part in how all chemical chains behave.
Global financial markets have rebounded strongly since Q4. The question we all need to ask is: How much of this rebound is the result of a tangible improvement in economic fundamentals versus more liquidity in the system? The latest rebound began with the US Federal Reserve’s $400bn Operation Twist programme.