Europe Q3 phenol contract talks stymied by flipped market, gloomy outlook

Author: Fergus Jensen

2020/06/22

  • Recent gains in spot acetone prices in focus
  • Downstream demand mixed, but generally weak
  • Depressed conditions seen continuing through to August
  • Autumn turnaround season may further tighten acetone market

LONDON (ICIS)--Phenol contract adder fee discussions for the third quarter are underway in Europe with the industry attempting to assess a supply and demand picture for the coming months, which by most accounts is blurry.

The ICIS phenol contract assessment, like many commercial contracts, is based on changes to upstream benzene costs and an adder fee that changes quarterly.

Discussions for third-quarter adder fees are focusing on weak phenol demand, current low feedstock benzene and propylene prices, recent gains in spot prices of co-product acetone, as well as buyer and producer margins.

Europe's domestic spot acetone range has been above the domestic phenol spot range since April, flipping the market for the first time in around three years.

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Phenol contract adder fee discussions have been slow to progress with participants facing difficulties in predicting how much material the market will consume in the coming months.

Downstream phenol demand conditions are mixed, but generally remain heavily depressed.

“For all those people who thought there was going to be a [demand] pickup - it's definitely not yet,” one Europe-based phenol producer said. Demand for phenol has been hit hard by the coronavirus pandemic, as well as macroeconomic factors that have been impacting the industry for more than a year.

One unconfirmed settlement on Q3 adder fees was heard last week at a rollover.

In contrast to normal conditions where order books are usually fairly clear for several months in advance, many buyers are waiting until the last minute to place orders, and for some producers even the July outlook remains murky.

Demand downstream, particularly into the nylon chain, has been depressed for several months following the automotive sector's weak performance.

Demand for phenol used in construction has also been slammed by the pandemic, with recent data showing that production in Europe's construction sector was down by nearly one-third in April compared to 2019.

While some incremental improvements are expected in the coming months, there may also be an increase in competition, including downstream material imported from other markets.

“It's a matter of competition between us and other producers, Chinese producers also,” a Europe-based phenol buyer said.

Some industries are not expecting a recovery until September as inventories remain full of downstream product.

“The outlook for a recovery is slow,” the phenol producer said. “They're expecting the whole of summer to be subdued,” she added, referring to demand into phenolic resins.

Current demand in the automotive sector was two-thirds below 2019 levels in May, and many in the industry are not expecting much of a recovery, at least until September.

In other downstream outlets like bisphenol-A (BPA), demand has seen less of a downtrend. Exports of BPA have also been supporting the market.

To some extent, however, low upstream feedstock benzene prices in April and May prompted customers to stock up, concealing the weakness of underlying demand.

“There was some speculative buying,” one Europe-based phenol buyer said. “Now, June inventory levels are quite solid.”

High inventory levels are also likely to drag on demand for phenol in the coming months.

“It's quite clear that in the short term, things are going to be pretty mediocre,” the buyer added.

Phenolic resins producers expect conditions to remain stable or deteriorate over the European summer period.

There is some geographical variation in demand, with industries in southern Europe generally worse off than those in the north.

There are concerns about supporting macroeconomic conditions, where sentiment has been relatively buoyant despite persistent weakness in underlying demand.

MARGINS IN FOCUS
Phenol buyers point to recent gains in spot prices and export sales of co-product acetone in contrast to 2018 and 2019 when phenol demand was stronger, acetone was lengthy and purchases of phenol compensated for low acetone prices.

Acetone volume sold on a spot basis in Europe now covers feedstock propylene costs, helping producers to recoup margins.

Spot prices for acetone in Europe, a co-product of phenol, were below feedstock propylene prices from late 2017 to April this year. Feedstock propylene prices hit a four-year low in April, and fell again in May, while acetone has been steadily climbing since the second half of 2019.

The Europe acetone domestic spot range was assessed last week having climbed for a third week in a row to a 14-month high at €630-700/tonne on a free-delivered (FD) basis in northwest Europe (NWE).

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However, producers also argue that the current low output of both phenol and acetone, driven by poor phenol demand and a corresponding tightening of spot availability, means that margins for spot acetone remain limited.

“If phenol demand is not there, we don't have enough acetone to take advantage of spot price,” a second Europe-based phenol and acetone producer said.

Moreover, by one producer’s estimates that around 85% of acetone produced goes to contracted customers, many of whom ink deals where the acetone contract price is adjusted monthly based on movements in the upstream propylene contract.

There were now “large discounts for end users [with contracts] linked to propylene,” the second producer said.

Weak feedstock benzene prices since April have also weighed on producer margins, the second producer added. The European benzene contract price settled at €171/tonne in April, a record low, having plummeted €424/tonne from March. The contract has subsequently regained €122/tonne with double-digit increases in both May and June, but still remains well below March levels.

Phenol contract prices move with benzene, and hit an 11-year low in April.

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“Our main arguments are that benzene is so much lower, so customers get cheap phenol through that,” he said.

Given that only around 0.9 kilograms (kg) of benzene is used to produce 1 kg of phenol, fluctuations in feedstock benzene prices have a disproportionate impact on phenol profitability: when benzene prices are high the advantage is amplified. Conversely when benzene prices are lower, producer margins decrease.

Producer margins also decrease because of inventory revaluations, where sharp declines in feedstock prices have an immediate impact on phenol contract prices, leading to losses on inventories of feedstocks held by producers.

Supply is ample, despite run rate reductions at most plants and an ongoing planned outage at the 55,000 tonnes/year PKN Orlen plant in Poland. Producer Seqens will carry our maintenance at its 175,000 tonnes/year facility in Peage, France, in late July.

Spot activity was seen last week and some imported material has been offered from the US in recent weeks at low price levels.

Several truckloads of spot material was heard transacted in Europe at €500-550/tonne on a free carrier (FCA) basis.

The Europe phenol domestic spot range was assessed on Friday, and increased slightly to €540-600/tonne FD NWE.

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Focus article by Fergus Jensen