Fecc: Coping with volatile currency trends

Exchange rates are an important factor in distributors’ competitiveness and profitability, but feedstocks, market factors, competitive pressure and sales strategies also play a part

European distributors and traders consider the general strength of the US dollar against the euro since mid-2014 to be a mixed blessing, depending on their individual import/export positions and the structural supply situation of the product in the wider European market.

The dollar, euro and sterling are moving rapidly against each other these days Copyright: Alamy

On 13 July 2014, the US dollar was valued at 1.36 against the euro. It appreciated sharply against the euro during the second half of 2014 and into early 2015, hitting 1.04 against the euro by mid-March 2015. It then hovered around 1.06-1.08 for the second half of March.

The strength of the US dollar against the euro has increased competitiveness for European suppliers selling domestic product. It also means that imports from US dollar regions into Europe are less competitive.

However, European sellers who are sourcing product from US dollar regions have also found the strength of the US dollar against the euro a definite drawback.

Certain distributors and certain products are more affected than others, depending on the ratio of regular versus spot business, volume size, import/export position and the European structural supply situation.

A main ethanolamines trader in northwest Europe says its core business in Europe is sourced both domestically and from outside the region and is agreed on a long term basis. This business is thus less susceptible to change, in contrast to more opportunistic spot business.

The company adds that a smaller proportion of its business is spot, sourced from US dollar regions. Competitiveness in this case has been affected by the appreciation of the US dollar against the euro.

It is not only exchange rate factors, however, which play a part in arbitrage options, but also market factors in Europe and in other regions, remarks the trader.

It reports that even though the euro had depreciated against the US dollar in November 2014, import volumes from Asia were unaffected. This, it suggests, was because demand was subdued and prices were bearish in Asia at that time so it made sense to export volumes to Europe, despite exchange rate factors.

The weak euro against the dollar and the fact that the Asian market is coming back after the Chinese Lunar New Year holidays mean that exports of ethanolamines are likely to be lower from Asia to Europe because of the combination of exchange rate and regional market factors.

In addition, mono-ethanolamine (MEA) imports were up in January 2015, according to Eurostat data. This rise in MEA imports was contrary to expectations in view of the strength of the US dollar against the euro.

However, there was some market talk that the increase in imports was more market-related and linked to some imports, possibly from the US, which had come into Europe in order to help to cover a lengthy maintenance turnaround in Europe for one supplier, which took place in early 2015.

OIL PRICE IMPACTS
Some players have also suggested that demand for MEA – used in shale gas exploration – has not been as good as expected earlier in 2015 because of the low crude oil prices, which has affected shale gas competitiveness and therefore MEA volume requirements. However, that has not been widely confirmed.

Another ethanolamines trader in northwest Europe says it is managing to work with its customers and deal with the exchange rate challenge. It continues to source the same import volumes from outside Europe, despite exchange rate factors, stating that it is “weathering the storm”.

It acknowledges, however, that it is not a big player and therefore does not really need to take big positions, which therefore lessens any exchange rate impact compared to those who are dealing with larger volumes.

One ethanolamines reseller in the UK, who generally sources two-thirds of its product from Europe and imports the rest from deep-sea origins, suggests that competitiveness has been impacted to such an extent for sourcing product outside Europe that it may not make any economic sense to do business at all in certain cases.

It says that exchange rate factors have also meant that distributors are more reluctant and cautious to take positions for imports too far in advance, stating that they prefer “to leave it to the last minute”.

The same distributor says it would prefer to source more ethanolamines from within Europe to be able to benefit from more attractive pricing, but says this is also challenging because other distributors and certain producers in the ethanolamines market “are in the same boat”. This is because MEA and tri-ethanolamines (TEA) are traditionally understood to be net import products in Europe as certain producers structurally import product from US dollar regions.

One producer in the ethanolamines market, which imports its product from the US, says it is bringing in fewer volumes in early 2015 compared with the same period last year for exchange rate reasons, although it acknowledges that its import volumes still remain significant.

The same source, however, refers to the fact that its monthly ethanolamine prices for MEA and TEA have increased to some extent in March in Europe for domestic feedstock-related reasons, which it suggests had helped to lessen its exchange rate disadvantage to some extent.

There is a similar situation in the European glycol ethers market, where one producer, who structurally imports its product from the US, says the strength of the US dollar against the euro is impacting its competitiveness and profitability in Europe. This view is also echoed by a distributor of US import product, which says it is struggling to sell and compete in Europe because of its high prices in March relative to domestic product.

TITANIUM DIOXIDE MARKETS REACT
In the European titanium dioxide (TiO2) market, selling sources say that imports from Asia, and China in particular, are losing their competitiveness for exchange rate reasons and suggest that less material is likely to be exported from China to Europe as a result.

One trader notes that Chinese exporters have not reduced their prices enough over the past few months to compensate for exchange rate factors and possible quality differences, although the latter point has not been officially or widely corroborated in the market.

However, the potential for less competition from import sources is good news for European sellers in the TiO2 market in particular because the market is structurally oversupplied and profitability is already unsustainably low.

On the flip side, European sellers have benefited from good export opportunities to certain US dollar regions during the second half of 2014 and early 2015.

This is particularly the case in distribution/trader–focused markets such as glycol ethers and TiO2. However, the same trend is also seen in other markets such as methylene chloride where fewer distributors are active.

One distributor in the TiO2 market says it has benefited from attractive export opportunities to North America from a demand and exchange rate perspective.

One distributor in the methylene chloride market says it is attractive to sell more in US dollar regions such as Africa, but it says it is struggling to obtain any more product because of supply limitations from one of its producers.

UK COMPETITIVENESS
It is not only the strength of the US dollar against the euro, but the strength of the pound sterling that has also meant distributors and traders in the UK have been able to source cheaper product from mainland Europe in euro terms.

On 13 July 2014, the pound sterling was at 0.79 against the euro and the pound sterling continued to be strong against the euro during the second half of 2014, and later appreciating to 0.70 on 11 March 2015. It was around the low 0.70s between mid-March and 23 March, according to XE.com history.

Despite the exchange rate benefit for UK distributors, which source product from mainland Europe, one reseller in the UK suggests that “there is a fundamental weakness in the distribution sector of not sitting on the pound sterling versus euro exchange rate advantage.” It says that it is aware of other distributors giving away any cost advantage for the sake of selling more volume. It says that once this exchange rate-related advantage has been given away, it is harder to get it back!

FEEDSTOCK VOLATILITY
On top of exchange rate factors, European distributors have contended with heightened feedstock volatility since the end of 2014 in particular. One European ethanolamine trader says that upstream volatility is problematic, particularly if upstream costs move up but derivative prices do not react as quickly.

However, the same trader says, “Generally I believe the market will adjust accordingly at some point and then it evens out.” Distributors are largely unfazed by upstream volatility stating that certain derivative markets are more driven by market factors rather than feedstocks.

One distributor in the UK adds that exchange rate factors have had more of an impact on its ethanolamine pricing compared to feedstocks in March. It says that prices in pound sterling terms were steady, “even with the big spike in C2 [costs in March], [the feed effect] was wiped out by the exchange rate.”

It suggests, however, that feedstocks may have more of an effect in April ethanolamine pricing, if the pound sterling/euro exchange rate remains stable in the meantime, although this remains to be seen.