Butadiene is the weakest link

(recasts, clarifying final paragraph)

BARCELONA (ICIS)–Butadiene (BD) has become the weakest link for cracker operators, as the collapsed automotive sector drags on demand for key derivatives such as styrene butadiene rubber (SBR) for tyre manufacture.

Even before the coronavirus pandemic took hold, BD had been under pressure following a multi-year slump in automotive production in many key markets. This had been triggered by the US-China trade war which hit consumer sentiment and slowed the global economy. Fears about pollution and the “dieselgate” scandal also contributed.

Then came the coronavirus restrictions with subsequent shutdowns of vast swathes of the global automotive sector. Although some manufacturers are planning to reopen production in May this is likely to be at very low operating rates and may take years to recover fully.

Major tyre and automotive companies including Bridgestone, Goodyear, Michelin, BMW, Daimler, Ford, General Motors, Honda, Nissan and Toyota have suspended operations  and shuttered their facilities worldwide amid the lockdowns, border closures, transport restrictions and travel bans imposed to contain the spread of the virus.

The coronavirus pandemic has disrupted supply chains and crippled demand in India, for example, as major tyre makers including Apollo, BKT, Ceat and MRF have suspended their operations due to the extended lockdown till 3 May.

India’s vehicle sales and production slumped. March vehicle sales in the south Asian country fell by 45% year on year to 1.05m, with production down 33.6% at 1.45m units.

CHINA BRIGHT SPOT
ICIS analyst Ann Sun, who covers the China market, says downstream tyre demand is better there than in other regions, while there is also more substitution of SBR for natural rubber as SBR prices decline.

She adds: “There is better BD demand due to positive margins for synthetic rubber producers, and three suspended synthetic rubber plants are planning to restart, with two of these having purchased spot BD.”

However China is forecast to add 15% to its BD capacity in 2020 as new projects start up.

In the US, Amanda Hay who covers BD, says that tyre plants have been shut for a month, with an 18% drop in tyre shipments in 2020 forecast. Lion Elastomers was still running in April, but Goodyear, the top consumer of BD for tyres in the US, was not running.

The impact on BD and SBR markets has been severe, with prices crashing to record or multi-year lows.  The European BD contract reference price for May fell 38% to €325/tonne free delivered (FD) northwest Europe (NWE). This is the lowest BD CP seen since contracts moved to monthly in January 2011.

Spot prices were last assessed at $50-80/tonne FOB (free on board) ARA (Amsterdam, Rotterdam, Antwerp).

OTHER LINKS IN THE CHAIN ARE STRONGER
Other key cracker derivatives are holding up much better, despite the pandemic. Packaging, in particular, is holding up demand well for some derivatives such as polyethylene (PE) and polystyrene (PS). With naphtha feedstocks so cheap, margins are still strong so operators will want to maximise operating rates for as long as possible. This leaves them with the problem of coping with oversupply of butadiene.

SHIP IT OUT
One solution being tried in Europe and the US is to ship it out to Asia in the hope of finding pockets of better demand there.

But there is no guarantee Asia demand will pick up, despite restrictions ending earlier there.

In Asia, the lockdowns may not be fully lifted until mid-May, at the earliest. Singapore has extended its partial lockdown until 1 June. If the tyre and auto sector in Asia starts to ramp up their production in June, this will help to boost sentiment and shore up the BD price.

Three vessels from Europe with around 30,000 tonnes of BD in total, are expected to be shipped out to Asia in May, with expected arrival in June.

According to Helen Yan, who covers Asia BD for ICIS: “This will put a lot of downward pressure on the BD price, and in view of the storage tank space, we may see distressed cargoes in Asia in due course, if the demand in China or elsewhere in Asia does not pick up by then.”

The BD price in Asia has dropped from $450 in early April to below $300/tonne CFR NE Asia due to the influx of BD from Europe and the US.

ICIS Europe olefins editor, Nel Weddle, believes European BD exports have leapt in February, March and April.

She adds: “With Asian BD prices at $300 or below it’s really hard to see how these volumes can continue to move across. We will be calling the traders involved to try to understand. We think ship owners are being helpful with freights as ethylene is sometimes combined on the vessel to help optimise things too.”

CO-CRACKING RAMPS UP
BD is not easily stored but cracker operators also have the option of feeding the product back through the cracker to produce other derivatives, known as co-cracking.

As Nel Weddle reports, European operators are maximising this technology, and even developing new ways to co-crack. In the past co-cracking at high rates ran the risk of coking up the cracker.

She said: “Someone told me last week that even the most co-crack averse players had embraced it. It seems this is the first time in ages that cracker products’ health diverged so dramatically to warrant it.”

GIVE IT AWAY?
To keep cracker operating, it is possible for profitable derivatives to subsidise others. With storage not really a long-term option, ICIS has heard an unconfirmed report of a company outside Asia selling BD into the region for free, with the buyer just paying for shipping.

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