OUTLOOK '18: Steady as she goes for Europe butadiene

21 December 2017 10:10 Source:ICIS News

LONDON (ICIS)--European butadiene (BD) market players are optimistic over supply and demand conditions in 2018 in general, but hope for a steadier and less chaotic year when it comes to pricing.

A year ago, European producers were sensing a real reversal of fortune, having suffered a couple of years of sluggish demand from the key consuming region, Asia.

The second half of 2016 had been a period of steady and consistent improvement in demand and pricing.

However, few imagined that the market’s emergence from the doldrums meant also a return to the extreme price volatility that had characterised the global BD market in the 2011-2012 period.

As 2016 drew to a close, spot prices rocketed with contract reference prices following suit, historically high adjustments being implemented to try and keep up.

This bullishness did not last long, with the peak being reached in early February of 2017, but the shock of strong gains, followed by huge troughs, left the market for the remainder of the year with a great deal more of uncertainty over pricing than people were comfortable with.

Spot NWE, Asian prices vs Europe contract prices

“2017 has scared some buyers, the high to low [contract reference price] spread in 2017 was the highest for some time,” a source said.

High-Low contract price  spread since 2011

Signs that indeed the volatility might have spooked some domestic consumers have come from talk that some consumers have opted for increased contractual volumes in 2018, but this might not be the whole story.

“Producers forget that they were the ones that pulled back on contracts [for 2017], wanting to play the spot game,” a second source said.

At the time, there had been talk of contract rebates shrinking and offers fixed at contract price flat, which several players felt was an attempt to push buyers away so export opportunities could be focused on.

European producers had manoeuvred for limited spot exposure in 2016, but having seen a revival in general conditions, there was more focus on spot opportunities again in 2017.

Certainly for the first part of the year, this will have paid off with the BD/naphtha price spread at high levels, but since then the ratio has dropped below two times naphtha which some producers say is unsustainable in the long run.

"It will be interesting to see how the spread over naphtha develops. November and December have been the worst months and we are close to borderline," a third source said.

"We will need to see some change,” it added.

Another sign that some players could be trying to steer away from extreme volatility is the whisper that some Asian buyers who regularly take in European volume are looking into using European prices in their pricing formulas.

“Some Asian buyers want to step away from buying imports on a NE [northeast] Asia CFR [cost and freight] basis – mixing up their portfolio," the first source said.

Growing domestic supply in the China market may help to stabilise market conditions too, albeit at the same time tempering demand for imports.

To what extent this may become standard procedure is hard to tell, but this could be an interesting development for 2018.

Other players have taken more steps to improve their own flexibility to manage the swings in prices.

At least one consumer, for instance, has secured additional tank storage for 2018, while also expecting a “standard year in BD”.

From a supply perspective, there will as usual be a round of maintenances planned at crackers and some BD extraction units in the spring and autumn of 2018.

Views on the operational reliability of European crackers and BD units have not changed, reliability is still considered to be quite poor in Europe so a certain amount of unexpected disruption is anticipated but on the whole, many players appear to have a steady supply view for 2018.

"Our best guess is that the market won't change too much on a global scale, [it will be] balanced overall with some troughs, the turnarounds will have most impact in the second half of the year," the third source said.

“2018 should be more balanced – new crude C4 (CC4) in new US crackers will make more available in the second half of the year," a fourth source said.

This factor could help, in turn, offset some of the impacts of the constraints planned for Europe.

"More or less, we are counting on a steadier market. The window of exports to the US shrinking, while exports to Asia grow," a fifth source said.

However, the bulk of Asian BD maintenance is scheduled to take place in the first half of 2018, so could still drive up prices and lead to some volatility.

"We still might see some surprises," a sixth source said.

Pictured: BASF's cracker at Ludwigshafen
Source: BASF

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By Nel Weddle