ACC: Europe polyurethanes suffer margin sqeeze

European isocyanates and polyols producers experienced eroded margins during the first half of 2014 because of relatively high feedstock costs. Margin pressure was particularly pronounced for toluene di-isocyanate (TDI) because of price erosion over successive months.

Europe TDI contract prices dropped by €150-160/tonne ($200-214/tonne) between January and June 2014, taking values in June to €1,940-2,000/tonne FD (free delivered) western Europe. This softening was driven by lengthy supply amid good plant reliability, as well as signs of muted activity from the key downstream bedding and furniture outlets for economic reasons.

Corbis Images The pressure is on for polyurethane producers in Europe

The automotive sector saw some recovery during the first half of 2014, but this was not sufficient to compensate for the fragility in the main bedding and furniture outlets.

The sentiment for TDI, however, changed in July when the length in the market disappeared and it turned balanced to tight because of a series of output constraints. In July, TDI price sentiment firmed by €30-50/tonne on average, driven by sellers’ need to restore profitability as levels became unsustainably low, along with balanced-to-tight supply, despite low seasonality.

For methyl di-phenylene isocyanate (MDI) and polyols, prices were relatively steady during the first six months of the year, although sellers say that profitability was adversely affected as any higher upstream costs were not passed on because market fundamentals were not sufficient to support this, according to buyers.

For MDI, prices largely rolled over into January and February, although some selective rises were also heard in February. Crude MDI prices were assessed at €2,020-2,100/tonne FD western Europe and at €2,230-2,280/tonne for pure MDI. The relative price stability was due to upstream benzene cost pressure being weighed against good availability and reasonable demand for crude MDI in the main downstream construction sector for the time of year.

In March and April, however, MDI prices edged up, taking values in April and the second quarter to €2,070-2,130/tonne for crude MDI and €2,260-2,330/tonne for the pure grade. This was because of a firm producer stance for margin recovery reasons and better-than-expected demand for crude MDI in the main construction sector due to the mild winter in Europe.

In May and June, MDI prices were relatively steady amid balanced market conditions. For July and third quarter MDI business, prices, however, softened, despite the hike in the upstream benzene contract price, because of balanced-to-long supply and signs of muted demand. Some players say that the traditional seasonal pick-up in construction activity during the second quarter was diluted by better-than-expected activity during the first quarter. Some add that ongoing economic constraints in parts of the Mediterranean had also limited construction activity.

Pure MDI demand into the main footwear sector generally held up seasonally well in the first quarter of 2014, albeit with a few exceptions. During the second and into the third quarters, pure MDI demand for footwear applications started to slow seasonally, although the latter was contested by one isocyanate producer who says it continued to see robust demand during July, with little to no signs of any seasonal softening.

There was, however, talk of strong competition downstream in the Mediterranean, according to one MDI buyer, who believes his competitors were benefiting from lower priced Asian MDI. However, the latter was not widely confirmed.

POLYOLS STEADIER

In Europe, polyether polyols prices were largely steady during the first quarter and part of the second quarter, despite higher upstream cost pressure. This was because of overall good availability, despite some technical issues for US-based Dow Chemical at its Terneuzen site in the Netherlands in early 2014, which were mitigated by reasonable, albeit fragile demand from the main downstream bedding and furniture sectors.

Between January and May, polyols prices rolled over at €1,760-1,830/tonne FD NWE (northwest Europe) for slabstock conventional polyols and €1,980-2,050/tonne for sucrose-based rigid polyols. In June, however, prices softened slightly, although some rollovers were also heard. This was despite higher raw material costs, and linked to muted downstream bedding and furniture activity and strong competitive pressure among certain players.

The majority of June polyol contract business was booked prior to news of the explosion and fire at the Shell Chemicals/BASF joint-venture styrene monomer/propylene oxide (MSPO-2) installation at Moerdijk, in the Netherlands. In July, however, slabstock conventional polyol prices rose on the back of a firm producer stance for margin recovery reasons and reduced availability, following upstream plant disruption at the Moerdijk MSPO2 unit. Flexible polyol prices were assessed up in July at €1,780-1,870/tonne FD NWE, which represented average increases of €30-60/tonne from June.

For rigid polyols, prices in July and the third quarter were mixed between rollovers and modest rises, with prices assessed at €1,970-2,030/tonne FD NWE. While margin recovery was also necessary for rigid polyols amid higher cost pressure over recent months, players say rigid polyols supply was less affected by the MSPO-2 disruption at Moerdijk.

This was attributed by some players to lower propylene oxide (PO) feedstock content for certain rigid polyol grades, depending on formulation, when compared to flexible polyols, although this view was contested by others. There was also talk of players prioritising production of certain rigid grades amid better margins, where flexibility allowed. However, the latter view was not widely confirmed.

MARKET CONSOLIDATION?

Looking ahead, growth expectations for isocyanates and polyols in Europe are limited to around 2%/year and up to 4%/year over the coming years, depending on source and product. Growth forecasts have been capped because of the mature nature of most parts of Europe.

Two new worldscale German TDI plants for Bayer MaterialScience at Dormagen and BASF at Ludwigshafen, each with nameplate capacities of 300,000 tonnes/year, are due to come on stream by the end of 2014 or early 2015 respectively.

The TDI expansion plans are driven by long-term investment and commitment to the TDI market, as well as global growth forecasts, especially for emerging markets such as Middle East and Africa. This new TDI capacity, however, also means some restructuring plans for both players, such as Bayer closing its existing TDI and pilot plants at Dormagen with a combined capacity of 105,000 tonnes/year. Bayer also plans to convert its existing TDI plant at Brunsbuttel in Germany to MDI, although these plans have been put on hold for the time being for market reasons.

BASF also plans to shut its existing 80,000 tonne/year TDI unit at Schwarzheide, Germany, and replace it with its new single-train TDI unit and new precursor production at Ludwigshafen.

Other market players consider that the European TDI market is structurally well supplied and new TDI capacity is unlikely to be sufficiently absorbed, amid ongoing fragile downstream demand in certain sectors and parts of Europe. In addition, while TDI is a global molecule and there are some export 
opportunities, some such suggest that the potential may not be as high as originally expected, particularly because of geopolitical tensions in the emerging markets such as in parts of Middle East, Africa and central Europe.

Players say that the imminent new European TDI capacity, as well as the Dow Chemical/Saudi Aramco Sadara Chemicals joint-venture complex in Saudi Arabia, which will include polyurethane (PU) production and is expected to start full operations in 2016, means that something will need to give and more market consolidation in Europe may be necessary over the next few years.

• Heidi Finch is a pricing editor with ICIS, based in the company’s UK office. She covers the isocyanates and polyols markets in Europe on a regular basis