US Sept BD expected to roll over, stay at 2009 lows

26 August 2013 19:36 Source:ICIS News

US Sept BD expected to roll over, stay at 2009 lowsHOUSTON (ICIS)--In August, the monthly contract price for US butadiene (BD) dropped by more than 30%. For the September contract, which is expected to be settled this week, it is expected to essentially roll over.

So if you are a producer making BD that only fetches 40 cents/lb ($882/tonne, €662/tonne), what can you do?

The short answer, according to sources, is "lots of things".

One thing you can do is have an industry-wide split settlement. That is what US producers did in August.

Two producers set their August price at 40 cents/lb, one producer set its price at 46 cents/lb, and another set its price at 47 cents/lb, sources said.

What happened in the market in August was the monthly contract price among the three producers that account for about 85% of the market dropped by more than 30%. In July, the contract price was 66 cents/lb. In August, it dropped to a range of 40-46 cents/lb among the big three.

The last time the US BD contract was at a similar level was July 2009, when it was 45 cents/lb.

The other thing you can do with cheap BD, sources said, is co-crack it. That basically involves taking BD, running it through the cracker again, extracting the C4s, and then using them for a more-profitable derivative stream. These days, that means making ethylene.

"I don't think BD producers co-crack all that often," said one source. "The price of BD has to be really low, and there are downsides to co-cracking."

One of the negative factors to co-cracking is carbon build up.

"If you have to take a column down every 120 days to clean the carbon residue," one source said, "when you co-crack there's more residue so maybe you have to take it down every 90 or 100 days."

While sources could not confirm that any BD producer is co-cracking, sources said that if anyone is co-cracking it is most likely in Europe.

"I don't think anyone in the US or Asia is doing it," one source said. "I think it's just a leverage point used in negotiations. The producers basically say to customers, 'Give us a good price for BD now, or we'll start co-cracking, reduce the supply, prices will go up, and you'll just end up paying more later.'"

It is widely believed that some producers in Europe are co-cracking BD.

"Europe is an export market," one source said. "So their supply is usually long anyway. When prices get this low, it makes sense for them to co-crack."

Why not just hold onto the BD until prices go up?

"BD has shelf life and storage issues," said one source. "At most, you can keep it for about 90 days. The other issue is storage. Many producers simply don't have the storage capacity to have excess BD sitting around."

Some producers that have vertically integrated production processes are converting BD to synthetic rubber (usually styrene-butadiene-rubber or SBR). Sources said some Asian and European BD producers have been making BD, converting it to SBR, then storing it or shipping it to other markets. Converting excess BD to rubber has the added advantage that it costs less to ship - about $200/tonne less - because it does not need to be kept under pressure or climate-controlled, sources said. And while BD has a limited shelf life, SBR can be stored for up to a year.

"The problem with storing it," one source said, "is it doesn't help prices even when demand comes back. The excess material keeps prices down, at least temporarily."

And demand is the fundamental problem facing BD and SBR producers around the world. In short, there is little demand because consumers are unsure about the economy so they are waiting to buy replacement tyres - which account for about 80% of tyre sales - until the last possible minute.

"I've been in this business for 30 years," said one tyre executive, "and I have never seen as many bald tyres and exposed cords as I do today."

In July, Goodyear reported that it sold 1.6m fewer tyres in North America in the first six months of 2013, compared with the year ago period. And no one in the BD or SBR business sees the tyre business, which accounts for nearly 80% of downstream sales, getting better anytime soon.

"I've stopped trying to guess when this market is going to turn around," said one source.

Estimates earlier this year had predicted that consumer confidence and employment would be improved enough that demand for replacement tyres would start to pick up in the second half of 2013. Now, most estimates do not see the market turning around before sometime in the second quarter of 2014.

So for the near term, US producers will have to figure out ever more creative ways to make a buck on 40-cent BD.

Major US producers of BD include ExxonMobil, LyondellBasell, Shell and TPC Group. Major US producers of SBR include Ashland, Negromex and tyre makers such as Goodyear.

($1 = €0.75)  

By Mark Yost