Margins stay strong despite rollercoaster styrene pricing
The year 2017 has been marked by dramatic movements in global styrene prices, driven largely by supply-side developments as well as underlying feedstock movement. Through it all, however, margins have remained at high levels, and ICIS believes they are likely to continue strong.
European styrene contract prices rose €665/tonne over the five month period from October 2016 to March 2017. This equates to a 68% increase. The factors behind this are diverse and represent to some extent a perfect storm of conditions.
Firstly, raw material prices increased sharply over the same time. The European benzene price rose 57%, driven by increases in naphtha as well as by global shortages. However, styrene manufacturers have been very successful in pushing through these prices, for both short-term and long-term reasons.
Over the past five months there have been a series of unplanned global outages – most noticeably in the United States. Currently, around 20% of US capacity is out for planned or unplanned shutdowns. This takes away North America’s normal position of exporter to the world.
Spot prices have risen rapidly as traders and buyers have struggled to cover shortages. This shortage has enabled suppliers globally to push up contract prices by more than benzene increases. There was a belief that planned shutdowns in Asia would put further pressure on global supply, increasing prices further.
In the end, improving global supply – with length especially in Asia, and falling raw material costs have popped some of the bubble and European spot prices have fallen 27% from the mid-February peak.
This has been driven both by falls in feedstock values but also by an improved supply of styrene especially in Asia. Chinese inventories of styrene have risen and risen, with lower demand in Asia than forecast but also by more incoming product from other regions. In effect, because the shutdowns in Asia were planned, players in the region had purchased excess stock. This coupled with lower demand than some had hoped for has led to a loose supply situation.
End-user demand for styrenics in China has not picked up post–Lunar New Year to the extent that many had hoped. There are a number of downstream polystyrene and other derivative shutdowns in Asia, which compensate for the missing supply. This, together with delayed purchases in the anticipation of lower prices, has led to sluggish purchasing.
CURRENT PRICING OUTLOOK
In theory, pricing should follow benzene down with dramatic falls. The supply situation is improving as the Asian shutdowns draw to a close and as US units come back on stream. Styrene buyers claim to be looking for falls in the April European contract price of €300/tonne to regain some lost downstream margin.
In practice, the decline could be slower than hoped for – with downstream participants noting that prices never go down as quickly as they go up. In addition, the age of assets in Europe and the US mean that the chance of a further unplanned incident is high. This is particularly likely as units try to restart after maintenance turnarounds.
Any further production problems could damage the delicate balance and cause further increases in pricing. Trinseo’s CEO Chris Pappas refers to this phenomenon as “fly-up” margin, the incremental rise in margins attributable to unplanned outages.
What is interesting is that European and global styrene margins have increased steadily over recent years – whether pricing is going up or down. This is largely due to rationalisation and consolidation of the global industry. The merging of smaller businesses and the subsequent spin-out of units like INEOS Styrolution and Trinseo have changed the behaviour of the industry.
These producers (globally number one and number four respectively) are no longer required to produce volumes to satisfy upstream crackers. Instead, they have a clear mandate to maximise profitability for this chain only, by tightening volumes.
Most players are downstream-integrated into polystyrene and other styrenic plastics. Here they face a disparate and fragmented base of customers that has little pricing power. They largely succeed in passing through styrene price increases into polymers and so benefit when styrene prices increase as it widens their margin.
We see little happening to change this cosy set-up.There are several barriers to entry for new players. The first is the extremely low growth in end markets. Styrene growth globally is less than 2%, with much of that increase dependent on emerging markets like China. Building a new plant in this environment is risky, and likely to endanger margins that are healthy after years of weakness. There are some styrene projects in emerging markets, but many of these have been repeatedly delayed or are still in the planning stage.
Even in China the few projects that are there are being pushed back. Some such as Sinopec Jingmen, which was due to open this year, have been delayed indefinitely.
The result is a 1% incremental increase in capacity in 2017, with only a 2% increase forecast in 2018. It is not until 2019 that a sizeable chunk of capacity in northeast Asia is due to come on-stream, with three units of 550,000 tonnes/year or more to open in China and South Korea.
The result of these limited capacity increases, combined with ageing western assets, is continued tightness and margin control. We see continued pricing volatility, as any movement in oil and benzene prices is amplified by an uncertain supply picture.