Some Asia PA makers mull further output cuts on margin squeeze

By Hazel Goh

SINGAPORE (ICIS)–A number of phthalic anhydride (PA) producers in Asia may consider cutting production further given a significant narrowing of price gap between their products and feedstock orthoxylene (OX), market sources said on Friday.

Spot PA values have risen in tandem with OX over the past two months, but at a much slower pace, narrowing their price spread to an average of $7.50/tonne (€6.00/tonne) in the week ended 24 August, according to ICIS data.

Between 6 July to 24 August, OX spot prices jumped by an average of 15%, while PA gained a mere 4%, according to ICIS data. (Please see Graph 1 below)

PA must be priced higher than OX by at least $40-60/tonne for PA makers to break even, according to industry sources.

In the week ended 24 August, PA prices were assessed at $1,395-1,420/tonne CFR (cost and freight) CMP (China Main Port), while OX prices stood at $1,390-1,410/tonne CFR NE (northeast) Asia.

“We will soon be selling at a loss if PA price increase do not catch up with that of [feedstock] OX,” said a PA producer.

This condition may force a reduction in operating rates at PA plants to tighten supply and allow product prices to increase and widen the price gap with OX to a “more workable spread” of $70-80/tonne, the producer said.

A few PA producers in the region have reduced their operating rates to about 70% in August.

“I think [PA prices at] $60-80/tonne higher than OX prices [is] reasonable,” said a buyer.

OX prices have been surging on the back of spikes in crude prices, while PA’s price gains are being weighed down by weak demand.

On Friday, US crude is trading at above $94/bbl, up by roughly $10/bbl from the start of July.

Shutdowns of downstream converters facilities between 15-27 August – during the Muslim fasting month of Ramadan that is observed in southeast Asia – further led to a softening of PA demand.

There are concerns that OX will overtake PA like it did in May-December 2011 that led to losses and forced PA makers to significantly cut output, market sources said. (Please refer to Graph 2 below)

A number of market players are hoping that PA demand will improve in September and October as downstream plasticizers and resins sectors typically ramp up production rates in the months leading to a seasonal spike in end-user consumption in December.

But many buyers remain cautious and are purchasing material on a need-to basis amid the gloomy macroeconomic outlook, and this will likely cap further PA price gains, market sources said.

Graph 1: Asia PA, OX prices converge

Graph 2: Asia OX prices exceed PA in May-December 2011

Source: ICIS

($1 = €0.80)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections