Europe styrene faces downward pressure for September

Focus article by Truong Mellor

LONDON (ICIS)–The European styrene monthly barge contract is poised for a decrease in September, sources said on Thursday, with downward pressure from raw materials and bearish sentiment in both Europe and Asia weighing down on the market.

Feedstock benzene is likely to see a sizable downward movement for September, with spot levels moving as much as $90/tonne below the August contract price of $1,450/tonne FOB NWE this week.

Similarly, ethylene is expected to see a significant reduction for September, although contract discussions have been stalled by an upturn in upstream naphtha pricing this week.

One styrene producer conceded that some downward movement was inevitable for September given feedstock indications, but felt this would be mitigated by a pick-up in demand next month following the lull in August.

“August was slow, and there was the expectation of falling prices which meant that buyers were holding back unless they were covering acute demand,” the producer added. “September demand won’t be great, but it will be better than people expect.”

There is also some speculation that the early start to the summer season and the subsequent drop in styrenics activity during the traditional peak season of June/July might indicate an early start to autumn consumption this year, but so far there are no overarching macroeconomic signals that this will be the case.

However, other sources did not see any major improvement for styrene next month, citing continued downstream sluggishness and a weak Asian market likely to keep US imports flowing into the ARA region.

Although the arbitrage window from the US Gulf is currently closed, players under contract to lift material will still find Europe a better destination than Asia. Chinese styrene prices saw further downward movement this week amid a pessimistic outlook and poor downstream demand.

Some US styrene producers are cutting back production in September alongside some benzene shutdowns, however, which will mean that there is less material to be taken under contract. This may help redress the oversupply in Europe over the coming weeks, especially if there is a corresponding upturn in derivative demand.

“The CP for September might drop, but in relative terms nothing changes,” added one trader. “Spot numbers have dropped, so the spread between contract and spot remains the same.”

The gap between spot and contract levels so far this year has been steady at around 15% (see graph), which is likely to have an effect on how European players balance volumes between the two in 2015.

Structurally high benzene numbers are also restricting any significant downstream recovery, with styrene struggling to keep pace with benzene prices so far in 2014 (see graph). However, there is a clear sense that the current slump in the styrene market is due to fundamentals rather than feedstock pricing.

The styrene spot market continues to hover below the $1,600/tonne FOB level. A deal for September loading was done midweek at $1,595/tonne, but the market opened lower this morning at $1,550-1,575/tonne in line with some downward movement on benzene.

Despite limited interest for FOB bulk material, several players reported an upturn in the distribution market, with more demand for smaller parcels of several hundred kilogrammes, and prices comfortably above $1,600/tonne FCA.

This is likely to be an indication that buyers are content to stay on the sidelines of the market for the time being and keep purchasing on a hand-to-mouth basis rather than attempt to build up inventory levels.