INSIGHT: After 2018 structural imbalances, Europe acetone, phenol markets learn to change

Source: ICIS News


LONDON (ICIS)--The European acetone and phenol markets went through a defining year in 2018 following a period of bucking the trend.

Even though structural overcapacity existed in prior years, the resultant imbalance that many in the market expected did not necessarily arise.

The products are globally oversupplied while downstream bisphenol A (BPA) consumption is stronger for phenol by nature than it is for acetone with ICIS consulting data showing that it represented the greatest amount of demand for both products in 2017.

Lack of acetone consumption could lead to excess European volumes if producers intend to meet full phenol purchasing interest.

However, 2017 was a year of acetone tightness with spot prices skyrocketing to the highest levels recorded by ICIS, while phenol supply had months of balance amid lower demand.

Temporary production outages, as opposed to any fundamental shifts, helped drive acetone spot pricing last year and operating rates lowered in response to quieter phenol conditions.

Therefore, after a spate of supply disruptions between September and November 2018, participants asked questions when acetone spot prices stayed below 2017 levels.

Phenol supply turned shorter in the third and fourth quarter of 2018 with spot pricing moving up, but acetone availability simply became more balanced as opposed to tight.

There was market talk that operating rates were adjusted again earlier in the year to equalise supply for acetone and phenol as demand had reversed for the latter product by becoming high.

Acetone had become well supplied in 2018 as phenol tightened.

Consequently, the conclusion among sources by late 2018 was that the anticipated structural imbalance had arrived.

These participants also expected it to stay into 2019 and beyond.

“I think the reality next year will be that phenol demand is so good that when all acetone is produced, you don't have a home for it. So, all phenol will not be produced,” said a European phenol seller.

“So, I think the name of the game is that phenol continues to be globally extremely tight next year and acetone is going to be long and anybody who wants phenol has to compensate the acetone loss, and every producer in the world has the same situation.”

There were a multitude of other factors that contributed to 2018’s developments and expectations of similar fundamentals next year.

One key influence was the start of commercial operations at downstream producer Saudi Methacrylate (SAMAC)’s methyl methacrylate (MMA) facility in Al Jubail.

This development marked the MMA market’s further progression into the use of alternative feedstocks, which promises to disrupt acetone consumption levels and fundamentals.

The Al Jubail facility uses the ‘Alpha’ process that produces MMA using ethylene (C2), carbon monoxide and methanol as opposed to typical feedstock acetone.

This process is independent from acetone and also the hazardous acetone cyanohydrin (ACH). But plants using this method of production have experienced a high number of technical difficulties in recent years.

Lucite International, which is part of the largest MMA producer, Japan’s Mitsubishi Chemical (MCC), owns the plant and developed the ‘Alpha’ process in the early 1990’s.

The first plant to use this process came online in Singapore in 2008 and a second facility was a joint venture with a newcomer to the market, SABIC.

This second 250,000 tonne/year plant. located in Al Jubail started up in late 2017.

A number of MMA producing plants using non-traditional process technology, and hence avoiding acetone feedstock,  are expected to come on-line in future.

An MCC project is planned in the US, for example, which is now expected to be on-line after 2023. It will be of a similar scale to the Alpha II plant in Saudi Arabia.

Evonik said in late 2017 that it had developed an ethylene and methanol-based production method under the brand name LiMA, highlighting the shift in the market.

“The technology sets new standards for using resources efficiently and for making notable reductions in its environmental impact. In a great many respects, LiMA is the most efficient MMA production technology developed so far,” the MMA producer said.

Source: ICIS Supply and Demand database

Additionally, there is the isobutylene C4 production method, developed in 1982 by Mitsubishi Rayon, Nippon Shokubai and Kyodo.

This process is useful in areas where hydrogen cyanide (HCN) is not easily available for the ACH method, for example Japan, South Korea, Singapore and Thailand.

There is expected to be further investment in Asia in smaller plants using the C4 method.

Future demand growth from the MMA sector may subsequently be impacted by the shift to alternative production processes. But, ICIS estimates show that the ACH method will continue to dominate worldwide production, accounting for approximately 60% of the total by 2020.

Source: ICIS Supply and Demand database

Another influential driver of European phenol and acetone fundamentals in 2018 was the imbalance globally.

Tight phenol supply and acetone length were present in multiple regions in a year in which more capacity came online.

Saudi seller Petro Rabigh started up its 250,000 tonne/year phenol/ 150,000 tonne/year acetone plant in Rabigh in 2018.

Indian supplier Deepak Phenolics  began commercial output at its 200,000 tonne/year phenol and 120,000 tonne/year acetone Dahej facilities in November 2018.

It is no surprise that acetone imports put downward pressure on numerous markets in much of 2018 and could continue to do so in 2019.

Capacity (tonnes/year) Phenol Acetone
Asia excluding China 4.06 million 2.47 million
China 2.73 million 1.65 million
Subtotal 6.79 million 4.12 million
Includes recent start-up
2017 China’s CNOOC and Shell Petrochemicals Company (CSPC) 220kt 130kt
2018 India’s Deepak Phenolics 200kt 120kt
Upcoming additions
2019 China’s Zhejiang Petrochemical 400kt 250kt

In Asia, the main reason for an unbalanced supply and demand situation was surplus acetone from BPA production.

Many Asian producers outside of China have integrated downstream BPA plants.

These integrated BPA facilities often end up with surplus acetone that needs to be exported if the sellers do not have other downstream plants that can consume it or phenol.

Rationalisation has taken place to curb the over-supply situation.

In September 2014, Mitsui Chemicals closed its line at Chiba, Japan.

In 2016, South Korea’s Kumho P&B shut down its No 2 unit that can produce 130,000 tonnes/year of phenol and 80,000 tonnes/year of acetone. Its No 1 unit has been idle since early 2009.

Yet, despite the long-term oversupply, there had been short-term supply lapses too.

For instance, in January 2018, Shell idled its Phenol 3 plant at Deer Park facility in Texas.

The facility has a phenol capacity of 240,000 tonnes/year, which represents about 40% of the company’s capacity.

The site’s idling affected the Asian market as the US was a major exporter to China, with a steady contribution of about 30% of its imports in 2016 and 2017.

US phenol supply cutback was further exacerbated when China’s antidumping investigations started on 26 March. Cargoes from the US, EU, South Korea, Japan and Thailand were involved in the probe.

After the announcement of a 10% import duty imposed on US phenol and 25% on acetone, there was limited US-to-China arbitrage.

Though US cargoes rerouted to other parts of northeast Asia and India, the sentiment remained bullish, since China, the major market, dictates the mood for the rest of Asia.

A slew of turnarounds at Chinese plants then led to a near four-year high in Asia’s phenol prices.

However, for acetone, Asian prices were curbed by high import availability, with cargoes available from Europe.

More possible trade flow changes are afoot as well following the phenol anti dumping investigations by China on the US.

“There will be less imports [to] China definitely for the US for phenol. So, it is going to go to some other Asian countries, most likely Taiwan as they are a net importer,” said a European phenol trader.

Source: ICIS Supply and Demand database

European phenol producers intend to adapt to their expectations of long-term structural imbalances and to a certain degree did so as more quarterly adder contracts were agreed for 2019.

Quarterly contract fees, as opposed to traditional annual agreements, give buyers and sellers more frequent opportunities to negotiate prices based on supply and demand dynamics.

Both sides of the market say they will gain as well as lose from the situation with consumers arguing that acetone length in 2018 could swing back to tightness, which would ease pressure on phenol pricing negotiations.

Some expressed anticipations of phenol conditions recasting too in the second quarter following a weakening in Asian pricing at the end of 2018 and amid global uncertainties due to weak economic conditions.

While sellers brought up other methods of adjusting to long-term fundamentals, such as offering phenol contracts based on the ratio change between acetone and upstream propylene.

“The key has to be phenol pricing, because with the root cause of the problem being the imbalance in phenol/acetone consumption...[it is] the only way out of it, you can't build phenol/acetone to get out of this,” said a European acetone buyer.

“What you have to do is increase your phenol pricing and some phenol demand will fall away as a result. That's actually what you want, because that acts to restore the balance.”

Source: ICIS Supply and Demand database

Often,European suppliers bring up the idea of recycling acetone to propylene as a way of combating oversupply.

There are also those in the market that are considering expansion into downstream segments in order to multiply their outlets for any extra acetone as well.

In November there were media reports that Swiss-headquartered petrochemical major INEOS was looking at purchasing the MMA business line of German firm Evonik.

INEOS did not comment on the reports at the time and an Evonik spokesperson said several bidders were in the reckoning.

Nonetheless, undoubtedly, it the industry is looking to evolve in a world where persistent acetone length and low phenol availability appear inevitable.

“Of course we are looking for new applications of acetone, or new projects...I am worried, of course I am worried...last year was a very good year in acetone. This year this is a very bad year. Next year we believe it will continue to be the same,” said a European producer.

By Pavle Popovic and Michele Bossi, Valentina Cherubin, Katherine Sale, Angeline Soh

Additional reporting by Samantha Wright