INSIGHT: Flatter coatings season intensifies European acrylate esters margin concerns

LONDON (ICIS)–The elongation of the European coatings season is intensifying margin concerns in the acrylate esters market, which have been further compressed by firming feedstocks this year.

For years, there have been concerns over margins in the market, one that normally posts annual demand growth above GDP rates.

Despite positive annual growth, however, the market remains unattractive for investment, linked to poor margins.

In previous years, producers welcomed the start of the coatings season, with the sharp hike in demand bringing the opportunity for margin improvement.

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Traditionally, demand would significantly increase between April and  September.

However, the coatings season has evolved and because of innovation in the paints sector, strength in the economy in past years, and changes in climate the season is now longer, and also flatter.

This is not a recent development, with some market players arguing this has been happening for at least 10 years.

SEASON ELONGATION
Innovation in the paints sector has contributed to this, with some applications now possible in colder temperatures, and also requiring at times fewer layers because of developments in pigmentation.

Strength in the economy in recent years has also caused a shift to professional decorators, which means there is less of a spike in demand around European public holidays or the summer break.

Climate change has also contributed, with milder winters and longer summers naturally lending themselves to a longer period for painting application.

While a longer demand period is something producers would happily welcome, it changes the dynamics of the market, limiting the drive from the fluctuations in demand to push for higher prices.

Margin concerns are not isolated to sellers, with a number of downstream paints companies issuing profit concerns because of the erosion further down the value chain.

FIRMING FEEDSTOCK, COMPRESSED MARGINS
Acrylate esters’ feedstocks have continued to increase, and there remain widespread concerns over the long-term impact from changes in key feedstock propylene.

ICIS Supply & Demand Database

Propylene supply in Europe is expected to remain in a balanced-to-tight position in the long term on the back of the shale gas revolution in the US and less C3 produced from ethane facilities.

While on-purpose propylene production is an area of investment, the supply and demand imbalance is expected to continue to exert pressure on the derivative sectors.

Margin concerns are not universal across the propylene derivatives, with polypropylene (PP) sellers easily able to pass on feedstock increases to customers.

The primary outlet for propylene is PP, accounting for about two thirds of propylene consumption globally but closer to 57% in Europe, with annual growth well above GDP.

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HEAVY MAINTENANCE SCHEDULE
The heavy cracker maintenance schedule has been a key driver across the European markets in 2019, with extensive preparations taking place ahead of the spring stoppages.

While there have been unexpected hiccups at some crackers, and delays in restarts, this round of stoppages have not resulted in any significant shortage in propylene.

However, there have been consecutive increases in the monthly propylene contracts, and some sellers actually said the moderate increases in the feedstock have been detrimental to the acrylate esters sector, as the rises have been harder to pass on.

There is a second period of heavy cracker maintenance in the autumn, which dictates the sentiment in the downstream markets, with feedstock supply thrust firmly into the forefront of players’ psyche.

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ECONOMIC WOES DAMPEN CONFIDENCE
2019 has been marred by economic woes and geopolitical tensions, contributing to dampen confidence across European chemicals markets.

Key downstream sectors such as automotive remain depressed and, as trade and political tensions rise globally, there is little optimism about a potential improvement.

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Automotive and the construction sector are the key applications for paints and adhesives, the main use for acrylate esters.

The lack of confidence manifests in hesitation from purchasers, and hand-to-mouth buying across many sectors is rife.

While the supply picture is likely to be largely driven by upstream outages, depressed sentiment over demand will be another obstacle preventing margin improvement for acrylate players this year.

Lower naphtha values throughout June have piqued interest for players in the derivative sectors, with the markets anxiously anticipating the July propylene settlement.

Until then, the market will continue to plod along, a far cry from the frenzy of previous summers for the acrylate esters market.

Acrylate esters include methyl-A, ethyl acrylate (ethyl-A), butyl acrylate (butyl-A), 2-ethylhexyl acrylate (2-EHA), and are used to make paints, coatings, textiles and adhesives.

Picture source: Isopix/Shutterstock

By Katherine Sale