Market intelligence: BD market balancing

13 June 2014 10:43 Source:ICIS Chemical Business

Spreads between Asia and US prices narrow after high volumes of butadiene and SBR imports enter the US. The market is heading towards a more balanced situation

After months of persistent downward pressure from low-priced imports from Asia, US butadiene (BD) average spot prices are finally falling closer to 70 cents/lb, and domestic contract prices are softening to end a three-month streak stability.

Imports for not only BD, but also derivatives such as styrene-butadiene-rubber (SBR), had reached what market sources said were record levels as BD tightness in the US and Europe led buyers to turn to Asia supply.

At the beginning of 2014, US BD producers were holding lower-than-expected inventories, and in the past four months, there have been a number of plant outages and maintenance not only in the US, but also in Europe, from where the region imports much of its crude C4 feedstock and finished BD.

US spot prices had hovered in the mid-to-high 70s cents/lb, but with the arbitrage window for less expensive material from Asia now closed, players believe that the market is correcting itself and that prices will fall further to restore a balanced situation.

The largest use for BD is for the production of SBR, and downstream demand had been weak amid oversupply and falling prices for natural rubber (NR), which can be used as a substitute for SBR in tyres.

According to a trader, the US typically imports about 10,000 tonnes/month of finished BD. However, that figure skyrocketed in February as 15,000-20,000 tonnes of Asian BD were said to be ordered in an effort to secure enough material to cover supply needs in the US.

“Everyone was generally tight,” a buyer said. “People panicked quickly because there’s no room in the supply chain when things get tight.”

As Asian demand for SBR, and in turn BD, continued to wane, prices for those chemicals began falling, widening the gap between prices in Asia and the US.

By mid-March, Asian BD was at a $490-540/tonne (22-24 cents/lb) discount to US spot prices. And with freight at $350/tonne, market sources said buyers were looking to exploit the arbitrage window.

However, the spate of buying in February had limited vessel availability, and since Asian suppliers were exporting to Europe and the US, supply in that region began tightening, causing prices in Asia to firm.

Two US producers declared force majeure at their BD facilities in late March and early April, further tightening supply and keeping US spot prices from plunging.

Still, the spread between Asia and US prices remained relatively steady between 20-23 cents/lb until the last week of May. And the combination of market conditions led US buyers to import another 40,000 tonnes in April and May, according to a trader.

“It’s a timing thing,” a buyer said. “I don’t think you’ll see imports at that volume again unless you have several producers with issues. The other thing was at the same time, Europe had low availability. We don’t normally import from Asia. A lot of those things fell in line as they did.”

Meanwhile, the US SBR market was facing a similar situation with a high number of imports, particularly from Asia amid weak demand, oversupply and competitive NR prices. One SBR producer said that in the past few months, US imports of synthetic rubber jumped by 5m-6m lb/month compared to mid-2013, now reaching in the mid-20m lb/month (11,000 tonnes/month) range.

“That’s a lot of rubber,” the source said. “I would say these are very high rates.”

The impact was primarily driven by high BD prices, as US SBR producers base prices on costs for feedstock. US BD contract prices had settled for March at 68 cents/lb for three producers and 78 cents/lb for one producer, and pricing rolled over for April and May.

With non-oil grade 1502 SBR prices in Asia in the 80s cents/lb compared to those in the US at well above 100 cents/lb, US producers were unable to remain competitive without cutting into margins.

US SBR prices were only able to remain steady because the market is heavily a contract business. Some suppliers were reluctant to lower prices and ended up selling less volume, while others chose to purchase imported SBR and resell material to customers.

“The low prices [of] Asian and European imports are temporary and unsustainable, and the customers know this,” an SBR producer said. “That is why they only try to buy on a spot basis for imports. Once demand picks up in Asia and the European region, the spot volumes will be less. This has happened in previous years of weak global demand.”

Market players said that US June BD contract prices would need to fall by more than 2 cents/lb in order for SBR producers to compete, and with three producers settling their contracts at a reduction of 3 cents/lb, this may provide the US SBR market some relief.

With low NR prices in Asia, substitution could result in less usage of SBR, and in turn less demand for BD. With an abundance of supply, BD prices would drop, which would put pressure on SBR prices.

And as European suppliers resume production following plant maintenance, they would have to lower their prices in order to compete with Asian suppliers. As a result, softer European prices would add to the downward pressure on US prices.

The week ended 30 May, the gap between US and Asian BD prices narrowed on the back of lengthening supply in the US and Europe, as well as the acceptance of two tendered sales to traders and higher bid and offer levels in Asia. The two US producers who had been on force majeure raised their BD allocation for June, and several players believed the arbitrage was closed.

While US BD prices had not dropped as quickly nor as much in the recent months as some had expected, traders and buyers believe prices will fall even further in July.

“I think it speaks to the fact that it is a market with four producers in the US with a lot of volumes on a contract basis,” a trader said. “Because of that, you have prices sticking. It’s very difficult thing to move it down and then move it back up when there’s a disruption. When you look at this, it’s a passing issue.”

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