US Trinseo expects Europe autos, China demand to improve in '19

Source: ICIS News

2018/11/09

HOUSTON (ICIS)--Trinseo expects European automobile production and Chinese demand to recover in 2019, which should benefit the company's polycarbonate (PC) and acrylonitrile butadiene styrene (ABS) businesses, the CEO said on Friday.

Both had fallen at the end of the third quarter, causing Trinseo to lower run rates at its PC operations in Germany and for Asian ABS producers to idle capacity by 20%, said Chris Pappas, CEO. He made his statement during an earnings conference call.

"There has been a lot off ABS capacity idling in response to this short-term dynamic of the last four months of this year," he said.

Trinseo had warned about the challenges in the weeks before it issued its Q3 earnings.

Several factors caused the decline in demand.

The challenges in Europe were caused by the introduction of a new standard used to test vehicle emissions, called the Worldwide Harmonized Light-Duty Vehicles Test Procedure (WLTP), Pappas said. Many original equipment manufacturers (OEMs) were not prepared for the new standard.

The result caused automobile production to fall.

In September alone, German automobile production fell by 24% year on year, according to data released by the country’s federal vehicle agency, the Kraftfahrt-Bundesamt.

The fallout from the new rules affected Trinseo because 50% of the output of its Performance Plastics segment goes into the automobile market, mainly in the form of ABS or compounds, Pappas said. Of this, the company's largest exposure is to original equipment manufacturers (OEMs) in Europe.

The consequences of the new emission testing standards caused margins and volumes to fall for the ABS and compounds portion of the Performance Plastics segment, Pappas said.

Adding to the problems in Europe was the slowdown in China.

About 60% of the world's ABS is consumed in China, and China meets 1/3 of its demand from imports, mostly from other producers in Asia, Pappas said.

During the third quarter, ABS demand in China dropped sharply because of lower production in the end-markets of the resin, inventory destocking and customers who delayed their purchases in anticipation of lower prices, Pappas said.

The slowdown in China was widespread, and it covered refrigerators and other appliances, he said. These are also important end markets for ABS.

The uncertainty about global trade also played a role in slower demand in China, Pappas said.

China and the US are in the midst of a trade dispute, with each country imposing tariffs on each other's imports.

The combination of all of these factors led to lower ABS demand, which caused margins to fall.

The challenges in China were so pronounced, Asian exporters diverted their shipments to Europe, Pappas said. The influx of material from Asia caused ABS margins in Europe to decline as well.

The demand decline in China was not limited to ABS. It also extended to PC.

Moreover, the weakness in PC demand took place while some plants resolved their operation problems and when new capacity started up in China, Pappas said.

Because of these trends, European PC producers kept their resin in the region instead of exporting to China, Pappas said. This caused PC margins to fall.

These problems are transitory, and Trinseo expects demand should return to normal in 2019, Pappas said.

By that time, supply chains and European automobile output should return to normal, Pappas said. In China, the economy should start benefiting from stimulus programmes.

Things should also improve if companies start restocking inventory and if more clarity emerges in regards to global trade dynamics, Pappas said.

There are already signs of these changes taking place.

In October, German automobile production began to recover, rising by 3% year on year.

In fact, Trinseo and other forecasts expects 2019 European automobile production to grow year on year.

For PC, demand should continue growing by 4%/year, and that should absorb some of the new capacity coming online in China, Pappas said.

In the medium term, Trinseo expects PC margins should contract, Pappas said. The magnitude should depend on the timing of the new plants and the quality of the material being produced by these new units.

For ABS, demand should grow faster than supply, he said.

For end markets, packaging, consumer electronics and medical are strong, Pappas said. Construction is under some pressure.

Meanwhile, Trinseo has taken steps to address the challenges. It started to slow its plants, manage its inventories lower its capital expenditures and cut costs, Pappas said.

Photo: Cars on display. NBR has uses in automotive components and parts, among others.
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