INSIGHT: Europe August petrochemicals market rings the changes

08 August 2012 15:00 Source:ICIS News

By Truong Mellor

LONDON (ICIS)--Received wisdom dictates that August is a subdued month in the European petrochemicals world. With the majority of players largely absent because of summer holidays, activity and demand come grinding to a halt, and prices consequently start to ease off.

While the first half of the equation holds true, the European aromatics market appears to be bucking the trend of lower pricing in recent years. In August 2011, a cutback in domestic operating rates, as well as fewer scheduled imports arriving, meant that benzene prices held firm in the midst of a $5/bbl drop in NYMEX light sweet crude values, catching the market by surprise.

August 2010 was less dramatic, but still saw firmer (albeit short-lived) macroeconomic sentiment and a bullish Asian market unexpectedly push European benzene prices up by $50/tonne (€41/tonne) early in the month, with industry selling to traders amid slow end-user demand over the summer months.

In either case, traditional market indicators – such as buying interest from derivative markets or even oil and energy costs – took a back seat to forces such as sentiment and confusion.

This year has seen European benzene spot prices move up to unprecedented levels, even as downstream demand struggled with the challenges of the wider economy. Back in May, in what was described by one trader as a “bloodbath”, deals were done as high as $1,500/tonne in the midst of severely curtailed supply and panicked short-covering.

The upturn began back in April this year, following a period of weak demand and pricing that saw suppliers cut back production rates. However, as styrene and cumene units came back on line, there was a sharp and sudden pull on material, which soon tightened European availability.

Weak ARA (Amsterdam, Rotterdam, Antwerp) pricing earlier in the year also meant that the regular benzene imports from markets such as Oman, India and Turkey had been diverted elsewhere, and the tightness was later intensified by some emerging production issues among European producers.

Benzene prices continued to move up, even in light of a $4/bbl drop for Brent crude futures and a corresponding slump for naphtha values – a sign that the European market was increasingly disconnected from energy movements.

So what is driving benzene this year? A combination of factors, it seems. The most consistent of these has been the limited availability of pyrolysis gasoline (pygas), the feedstock for benzene, amid weak polymer demand and lower output from European crackers. The softer benzene prices in the first quarter of 2012 also meant that a large amount of pygas was steered towards the gasoline sector, keeping benzene production capacity limited.

Following this, a handful of production shutdowns in Europe kept upward pressure on the benzene market, and while this appeared to be resolved by June – aided by the arrival of imports from Asia and the US – any relief felt among players was fleeting.

As the market began to stabilise in July, a sharp upturn in the US meant that European traders moved quickly to ship material from the ARA region to capitalise on the arbitrage window.

But underlying all these shifting arbitrage conditions, production setbacks and unforeseen acts of God is a fundamental shift in the way European players approach supply/demand dynamics.

While players often like to refer to a “perfect storm” of factors leading to these wild fluctuations in the market, the reasons behind them have generally been far more prosaic in nature.

Aromatics’ volatility has been driven by a fear of 2008 and a reprise of those conditions, when prices plummeted and players found themselves sitting on stock levels that were suddenly worth less than half their original value.

Since then, the mantra among management appears to be “less is more”. Or less product, at least – meaning less exposure to any sudden downturn on pricing. The expression “hand-to-mouth” has become common currency over the last four years, with companies meeting contractual requirements, but shying away from any meaningful stock building beyond that.

As a company, it makes a lot of sense not to overextend in such a volatile macroeconomic landscape. Certainly in this environment of spin-offs and joint ventures, players are looking to stay flexible and nimble, light on their feet in an uncertain time.

The problem is that this approach can backfire. This was seen late last year on styrene, when the delay of vessels from the US combined with restarts being pushed back led to spot levels spiking by over $200/tonne over the course of several days.

This was then followed by a sharp correction the following week, with numbers in fact going into freefall as December and the holiday period approached and market fundamentals took hold.

While the recent developments on benzene were driven by a variety of factors, they were all aggravated by players maintaining low stocks and running plants close to the line. All of which makes sense amid poor economics and subdued demand, but it leaves them vulnerable to sudden shifts in a market where people should by now be expecting the unexpected.

($1 = €0.81)

By Truong Mellor