INSIGHT: Record year for Europe acetone market features in Q4 phenol talks

Fergus Jensen

30-Sep-2020

LONDON (ICIS)–As discussions for Europe’s fourth quarter phenol contract adder fees near completion amid continuing pandemic-depressed demand, it should come as little surprise that netbacks on coproduct acetone have again been in the spotlight.

Acetone’s sharp climb this year took it above the Europe phenol contract price for the first time in 20 years.

Q3 saw Europe acetone spot prices hit their highest levels since 2017, pushing margins over feedstock propylene to an all-time high and prompting phenol buyers to request reductions to contract adders in Q4.

Downstream demand into phenol’s main outlets bisphenol-A (BPA) and caprolactam (capro) has been particularly slow to recover from the coronavirus pandemic.

“No one’s really looking forward to Q4 – it’s really dismal,” said a Europe-based phenol and acetone producer.

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

“It might be you see improvements in consumption here and there, but I don’t think with coronavirus we’ll suddenly be back to normal,” a phenol buyer said.

Some buyers are still struggling with stocks that jumped when phenol prices tumbled with benzene to an 11-year low in April.

“I think there’s still a lot of… demand that doesn’t really have a well-worked out plan by the customers,” said a Europe-based phenol buyer that was struggling to take contractual volumes, referring to the outlook for the fourth quarter. “It depends on inventory in the supply chain (and) it’s all very up in the air.”

While there have been incremental improvements, automotive industries (for one) are still operating below 2019 levels, which was already a tough year for phenol, and commercial vehicle registrations fell by nearly 30 percent from January to August this year, recent data shows.

“We’re going in the right direction, but there’s still a way to go,” one Europe-based buyer said.

BPA demand has been depressed, faced with up to 30% less epoxy resins demand during Europe’s lockdown period, while global capro demand has been down by an estimated 25 percent.

Just as the coronavirus pandemic was spreading in Europe in the first half of 2020, several of the region’s biggest producers declared force majeure, pushing the region’s phenol and acetone imports to a three year highs, according to data from ICIS supply & demand database.

The combined result of lower demand and greater supply has been a lengthening of the Europe phenol market, prompting producers to cut operating rates from around 85 percent in 2019 to an estimated 77 percent this year, according to data compiled by ICIS analytics.

“There’s a lot of material,” another phenol buyer said, referring to regular shipments from Russia, the US and the Petro Rabigh plant in Saudi Arabia.

Recent modest improvements in demand were “positive news, but whether it’s enough to get operating rates back up remains to be seen,” a Europe-based phenol and acetone producer said. “Inventories are still pretty high.”

ACETONE PEAKS
Lower operating rates this year, coupled with a reduction of acetone imports from other regions, dramatically tightened the acetone spot market in Q3, pushing the spot range to a three-year high in early August.

Phenol buyers have pointed to acetone’s record year in 2020, and contrast this with 2018 and 2019 when phenol demand was stronger and acetone was lengthy and in some cases phenol purchases compensated for lower acetone prices.

The low end of the acetone spot range fell last week below €1,000/tonne for the first time in around two months. The reversal comes amid mixed buying interest, even as demand in some downstream segments has improved.

Europe spot acetone prices are still around 30% higher than feedstock propylene costs, after the “acetone ratio” hit an all-time high in July.

As acetone is derived from benzene as well as propylene, and since it is also a coproduct of phenol, its ratio to propylene is used as more of a guide than a direct indicator of profitability.

Producers argue that the high acetone ratio this year has had limited impact on their margins, because of the relatively low operating rates and amount of spot material being sold.

“Acetone is great if you’re selling huge amounts on the spot market and we’re not,” one producer said.

Approximately 85% Europe’s acetone production is believed to go into contracted demand. Europe’s spot acetone demand is estimated to be between 10,000-13,000 tonnes per month.

The acetone MMA contract price has now been below the Europe acetone domestic spot range for around six months. Supply limitations and comparatively high spot prices this year have prompted some larger buyers and traders to increase acetone imports from other regions.

Europe acetone imports and exports have fluctuated wildly this year along with prices. Europe was a net importer for the first half of 2020 following production upsets in Q1, but returned to net exports in May, when Asian prices became more attractive.

The East-West arbitrage reopened in Q3 as European material became scarce and domestic prices became the highest globally, and the region is expected to have become a net importer again.

Heading into Q4, acetone availability remains tight but spot activity has quietened on speculation over impacts the latest import cargoes will have on the market in October, when several major plant turnarounds are also scheduled.

To that extent, impacts of acetone on the phenol market in the coming months are uncertain.

“Most (of the imports) are linked to end buyers,” one Europe-based trader said, adding that the arbitrage from Asia made acetone imports less attractive now.

“Nobody wants to take the risk – it’s not really justifiable with six to eight weeks of transit.”

Insight article by Fergus Jensen

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