EPCA ’19 – INSIGHT: Europe phenol, acetone industry sweats out 2020 plans as external pressures mount

LONDON (ICIS)–External pressures eating into phenol and acetone demand are pushing European producers to propose further cuts to run rates, rethink contract structures, and diversify their businesses.

These are some of the strategies phenol and acetone producers have proposed for the coming year after disappointing performance for petrochemical companies in 2019.

Several producers are considering further run rate cuts in efforts to improve margins in 2020.

While exact levels are not made public, Europe’s phenol and acetone producers have already reduced operating rates significantly, according to sources, but slipping downstream demand has increased pressure on the market and margins are still depressed.

“It’s long everywhere,” one producer said, referring to the downstream demand for bisphenol-A (BPA) and methyl methacrylate (MMA), hit by slowing growth and reductions in the global automotive industry, a major outlet for both products.

The sources were speaking on the sidelines of the European Petrochemical Association (EPCA) annual conference earlier this week.

CARGOES
The downstream market has also been eroded by an imbalance between Asian and European upstream feedstock costs, which has prompted flows of BPA from South Korea into Europe.

New interest in the European market has emerged from other Asian suppliers.

Several companies have enquired about freight rates to move product from Asia, and said they are considering developing storage tanks in Europe to take advantage of arbitrage on Asian products in the phenol and acetone chain.

“Anyone in the trading space has cargoes originally from South Korea,” a Europe-based phenol buyer said. “Now we’re having real offers.”

Bulk rates from Asia were said to be around $110-120/tonne for shipping phenol, it added.

The gap between Asian spot and European contract phenol prices has been widening since the end of 2018.

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Some product from South Korea, a major source of BPA for European buyers, was recently offered for €1,080-1,140/tonne DDP/CIF (delivered, duty paid/cost, insurance, freight) Europe for large volumes.

This was described as still attractive, according to market sources, albeit less attractive than it has been.

Europe-origin material was available for around €1,300/FD (free delivered) NWE (northwest Europe) as of last week, typically for smaller volumes.

Yet Asian producers face similar acetone oversupply problems to Europe, and feedstock propylene costs there are also currently higher than acetone prices by a wide margin.

Plant turnarounds, an uptick in demand for acetone for isopropanol (IPA) feedstock, and lower run rates in Asia have led to an increase in acetone prices there.

The arbitrage between Asian and European acetone is now closed and has prompted additional tightening of the European market since August.

Asia’s producers are also looking for new markets to sell downstream products as China has imposed tariffs on BPA imports.

“Our headache has slightly changed,” one Asian acetone producer said.

“Last year phenol demand was strong and operating rates were high. That’s why acetone [became] long.”

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Aside from pricing considerations, businesses hoping to import phenol, acetone or downstream products into Europe from current levels still face several hurdles.

A landslide of imports are not expected to arrive next month. Existing deep-sea terminals and storage infrastructure are limited to a handful of players.

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Several companies said they were exploring the option of setting up new shore tanks and importing and distributing into the European market, after earlier unconfirmed reports of projects underway.

CUMENE FORMULA
Spot acetone prices have been climbing in recent weeks as a result of reduced availability of both imported and domestically produced volumes, providing limited relief to producer margins, but these sales are still being subsidised by phenol.

“Acetone has been a huge burden on the value chain,” a phenol buyer said, referring to the effective subsidy on acetone sales.

One producer said their company had not been profiting from acetone sales since 2005, and is considering revising contract pricing for phenol.

“My objective is to have a fair discussion with customers on monthly adders or have a formula which takes into account acetone,” the producer said.

The ICIS phenol contract assessment, like many commercial contracts, is based on changes to upstream benzene costs and an adder fee that changes quarterly, but these are not linked directly to spot acetone prices.

But it is “too risky” not to include acetone in a fixed phenol pricing formula, the producer said.

Structures that take into account fluctuations in acetone spot prices in relation to upstream propylene costs could also relieve some pressure on producers that has stemmed from the yawning gap between the pair.

So-called “cumene formula” contracts, named after the upstream feedstock for phenol and its co-product acetone, are already in use by at least one European supplier.

Lengthy phenol contract adder fee discussions put a burden on buyers and sellers and have been complicated as often they focus on producer margins and operating rates in which there is speculation risk as figures cannot be disclosed for compliance reasons.

There is ongoing speculation, for example, over capacity utilisation rates of plants in Europe and how low they can go before it no longer is economically possible to continue.

“It’s not time to slit our wrists yet,” one producer said.

While some participants criticised the current structure as too far removed from supply and demand dynamics, not all buyers would be willing to adopt a formula that includes an acetone component, one producer said.

Phenolic resins producers, for example, may reject a pricing formula that incorporates acetone price fluctuations, as this may be regarded as another form of acetone subsidy.

RIPPLES
Numerous external factors are currently impacting phenol and acetone markets. Particularly concerning are the increased international controls on trade that add risks and headaches for suppliers and buyers.

“Subdued is not the word,” a Europe-based distributor said, referring to trade tensions, Brexit, and the automotive industry slowdown.

“Business is not good. We have to position ourselves.”

The US has recently taken a more aggressive stance on trade with Europe and has threatened a wide range of new tariffs.

It imposed tariffs on European aerospace company Airbus last week, and President Donald Trump told reporters in August that all the US needed to do to was “tax their cars and they’d give us anything we wanted because they send millions of Mercedes over. They send millions of BMWs over.”

While Europe has yet to introduce additional tariff barriers on imports, it may be encouraged to do so if it becomes the odd one out and its markets are flooded with cheap goods where shipping to some countries is no longer viable.

External pressures and negative sentiment are expected to continue to dominate markets over the coming months, but there is still business going on albeit at lower levels in many cases, many participants said.

And, while demand may grow during that period, negative sentiment also has its limits.

“The trade war is casting a big shadow over things and that is kind of built into people’s pessimism, so it may not get too much worse,” an acetone buyer said.

The current situation, however, is a far cry from 2008 “panic” levels, and there is some cautious optimism among participants who have referred to steady business in the automotive aftermarket, construction business supported by low interest rates, and slower growth as opposed to declines in consumption.

“The ripples in the pond still need to settle,” a European phenol buyer said.

“A rebound can happen as long as employment is solid, and it can happen relatively quickly.”

Phenol is used in the preparation of resins, dyes, explosives, lubricants, pesticides and plastics.

Acetone can be used in solvent applications and in the manufacture of chemicals for the coatings, plastics, construction and automotive industries.

Pictured: The Industry Museum in Gladbeck, located next to INEOS’ phenol production facilities
Source: Hans Blossey/imageBROKER/Shutterstock

By Fergus Jensen