Market Outlook: Phenol/acetone markets are under ressure: ICIS Consulting

Over the past five years, the phenol and acetone markets have seen a rapid increase in global production capacity while global demand growth for phenol, acetone and their derivatives has slowed. The main derivative markets for phenol and acetone are bisphenol-A (BPA), polycarbonate, epoxy resins, phenolic resins and methyl methacrylate (MMA), all of which have also seen investment in new capacity in the past few years.

The ongoing impact of increased capacity for these products, at a time of what seems to be lower than expected demand growth for many products, has been to increase competitive pressure on prices and change trade flows.

Phenol and acetone are inextricably linked as in most instances the products are commercially produced in the cumene process, which utilises benzene and propylene as feedstocks and is therefore significantly impacted by upstream price movements.

The two co-products are produced in different quantities, with around 1.5 tonnes of phenol manufactured for each tonne of acetone, but the economics of the process requires demand for both acetone and phenol.

Global phenol capacity is expected to have increased by more than 2.1m tonnes between 2010 and the end of 2016. The vast majority of this additional capacity, over 2m tonnes, has been built in Asia, with China leading the way. Most recently, in 2015, three new plants opened in China with a combined capacity of 800,000 tonnes/year.

These new plants have, along with other earlier expansions, increased Chinese phenol capacity threefold since 2010.

On top of this, in 2016, two new plants are expected to start operating in Asia. Thailand’s PTT Phenol has recently brought on stream a new 250,000 tonne/year plant. Then, in June, South Korean producer Kumho P&B is expected to start up a new 300,000 tonne/year unit.

Further availability will come from PetroRabigh’s new plant in Saudi Arabia, with capacity to produce 275,000 tonnes/year of phenol. Commercial operations are expected to commence in late 2016 or early 2017. Then further into the future, Ineos YPC Phenol (a joint venture between INEOS Phenol and Sinopec YPC) may still launch its 400,000 tonne/year phenol plant in Nanjing, following delays to the project.

Although new downstream capacity has come onstream during the same period, actual derivative demand has not kept pace with construction, pushing average global operating rates for phenol downwards.

This is partly due to the continued decline in optical media usage for polycarbonate, but the more recent slowdown in the BRIC economies (Brazil, Russia, India and China) has also played a part. As such, we expect operating rates to remain in the low-to-mid 80% range until 2020. Over this period, we forecast global demand for phenol to increase at an average of around 3% per year, with Asia and South America driving the growth in demand.

The major derivatives – bisphenol-A (made from phenol and acetone and used in both polycarbonate and epoxy resins) and phenolic resins – are currently expected to show similar growth on a global scale.

ACETONE – NOT JUST A CO-PRODUCT

A relatively large amount of co-product acetone capacity has either come on stream, or is expected in the next 18 months. Yet compared with phenol, global acetone markets have been less markedly affected by the new capacity in Asia.

Although over 1m tonnes of additional capacity have come on stream in the past five years, global operating rates are estimated to have remained in the mid-80s percent.

And acetone markets have certainly been more susceptible to short-term tightness in the past couple of years than phenol.

This difference comes about partly from the actual capacity increase being lower, and a somewhat more diverse range of derivative markets.

That being said, global acetone demand has increased at around 3% per annum in the past five years, a similar rate to phenol, and is expected to show slightly decreased growth over the next 10 years, again at a similar rate to phenol.

The increased usage of ethylene to make MMA, as opposed to acetone cyanohydrin, may cause acetone demand to soften. On the other hand, if there is further rationalisation caused by overcapacity in the phenol market, this could well end up making the acetone market tighter.

The capacity increases taking place in China are part of the drive for self-sufficiency in petrochemicals and make perfect sense for a country that in 2012 imported nearly 600,000 tonnes of phenol and almost 700,000 tonnes of acetone.

CHANGING TRADE FLOWS

The effect of the capacity increases on global trade, and China in particular, has been significant. The process of falling imports into China has been ongoing, with 2015 phenol imports now down to less than 200,000 tonnes, a fall of over 500,000 tonnes compared with 2011.

The majority of China’s import volumes have been from other Asian countries such as Japan, Taiwan, Thailand, South Korea and Singapore.

However, historically, approximately one third of China’s phenol and acetone imports arrived from Europe and the US.

With less demand for imports in Asia, phenol exports from Europe have reduced structurally, and the region switched to being a net importer in 2013, as higher-cost local production was reduced.

A similar effect is expected to be seen to some extent in the US. It is currently a significant net exporter of phenol, but does not import. While imports are not expected to come about, export levels are expected to remain under pressure

It is not just Europe and the US that are affected by changing trade flows. India, which imported 245,000 tonnes of phenol during 2015, overtook China as Asia’s largest buyer in 2015.

Steady growth being seen year on year in demand, along with high prices relative to CFR China, have made India the market of choice for suppliers seeking a home for excess volumes.

The ongoing reduction of Chinese imports and the lack of viable alternative markets in Asia means that surplus Asian volumes are expected to increasingly find their way to India, where there are just two domestic suppliers who currently cover only around a quarter of demand.

The Indian government’s latest anti-dumping duty decisions on phenol imports are reinforcing the market view that India could well be further swamped by phenol.

Although it has long been a net phenol importer, India has previously imposed prohibitive duties on phenol of various origins to try to stem cheaper shipments from overseas and protect its domestic producers.

However, South Korean and Singaporean phenol is apparently exempt from anti-dumping duty if sold through certain major trading companies, which effectively means that product from South Korea and Singapore can move unimpeded into India.

THE FUTURE

There is a degree of concern with regards to the effect global overcapacity and diminished trade flows will have on profitability. Speculation has been rife, since the announcement of the new capacities now expected on stream in onstream by 2017 and beyond, as to the likely outcomes. Will all this new capacity and changing trade flows cause rationalisation, and if so, where?

With relatively weak phenol operating rates expected for the next few years, we do expect to see some units close down.

We have of course already seen a couple of rationalisations, with plant closures in the US (INEOS’ closure of the unit in Plaquemine, Louisiana, which it had bought from Axiall) and in Japan (Chiba Phenol).

If global demand does not pick up, or worsens, we expect smaller, less-profitable units to be in danger of closure.

Currently in Europe we do not expect any further closures in the short term. This is due to better margins and integration – either upstream or downstream.

The picture is somewhat changed when the linked acetone market is taken into account – which by some reckoning may keep many phenol-acetone units running profitably in the near future.

However, as it stands, and whatever else happens, we do not expect much in the way of further new phenol-acetone capacity in the next 10 years – perhaps until India follows China’s path to self-sufficiency?