Styrene demand weakens due to global uncertainty

Downstream demand for styrene is weakening in most regions as economic uncertainty bites into automotive and electrical sales and single-use plastic bans start impacting packaging sales.

On 24 October 2018, the European Parliament voted for a ban on single-use polymers. Outside the EU, a number of other countries and regions have decided to phase in bans, including Taiwan, India and South Korea. Zimbabwe has already completely banned expanded polystyrene (EPS). In North America, legislation has been passed more on a city by city basis, with restrictions in force in New York, Seattle and Malibu among others.

Styrene-based polymers such as polystyrene (PS), EPS, acrylonitrile butadiene styrene (ABS) and styrene butadiene rubber (SBR) are used in a variety of applications, including packaging, toys, automotive and electrical goods. Packaging is the largest application and includes PS food packaging such as yoghurt pots or plastic forks, EPS foam for protecting electronics goods, CD cases made from PS and trays made from ABS.

The EU ban on single-use polymers will cover all EU countries by 2021 and include plates, beverage stirrers and food containers made from EPS. There are exceptions where no other alternatives are readily available but even these are subject to reductions.

Crucially, brands themselves are also making changes to reduce the use of single-use plastics. In an initiative by the UN Environment Programme (UNEP) and Ellen MacArthur Foundation, 250 major brands have pledged to cut plastic waste from operations. They have promised to eliminate all single-use plastics and invest in new technology so all packaging can be recycled by 2025. Three of these brands, Coca-Cola, Pepsi and Nestlé, are said to be responsible for 64% of plastic pollution in the US and Canada.

EFFECT ON DEMAND FOR PS AND EPS

The net effect is likely to be a continued decline of PS and EPS demand for packaging in Europe and globally. We see:

■ Lower consumption of single-use goods (consumers may bring their own coffee cup or make coffee in the office)

■ Substitution to non-plastic packaging (paper or other substitutes)

■ Substitution to other more easily recyclable polymers – polyethylene terephthalate (PET) especially

However, we expect this process to be gradual. A lot of substitution has already taken place due to price fluctuation. In addition, different countries have different restrictions and timings so the global ban will be a gradual process.

Electricals and electronics are the second most significant use of styrenics globally, especially for ABS and high-impact PS (HIPS). They are used in white goods from fridges to air conditioning units, as well as computers, mobile phone handsets, vacuum cleaners and digital media like CDs.

Consumption for this application is dominated by Asia – with over 75% in northeast Asia alone, mostly in China. This is because production of white goods is dominated by the region. China has seen annual double digit growth of white goods production from 2000-2017.

However, production of white goods is faltering a little this year as the US-China trade war impacts economic confidence. The US government implemented Round 3 of its tariffs on 24 September. This round for the first time included finished plastic goods, with $5.6bn of trade covered by the tariffs. Key Chinese electrical goods for Round 3 included desktop computers, vacuum cleaners and air conditioners. President Trump is now threatening a further round of tariffs to cover a wider range of goods, including cell phones, laptops and tablets, toys, computer monitors and video game consoles.

UNCERTAINTY

The result is uncertainty, and ABS and PS consumption in China has been weak in the normal pre-Christmas manufacturing season during Q3. Manufacturing PMIs (purchasing managers indexes) are now falling throughout Asia, including China, where the official PMI is now the weakest for 15 months. Styrene inventories have built up in China.

In the medium term, the higher prices for US consumers of China’s goods could encourage manufacturing in other areas in Asia. China has been encouraging partnerships with a number of emerging market partners through its Belt and Road Initiative. This has been accelerated due to the tariffs. Other Asian players are also looking at investing in south and southeast Asia. For example South Korean giant Lotte Chemicals recently bought a couple of ABS plants in Indonesia, referring to its “post-China strategy”.

Automotive is a smaller application for styrenics, with other plastics such as polypropylene (PP), polyurethanes, and polyamide (PA or nylon) more significant. Around half of the styrene in a vehicle is in the tyres from SBR, with the other half in polymers like ABS in the bodywork.

The use of polymers for automotive applications has been hit by a sharp decline in automotive production and demand in Europe during September. This was due to the EU-wide introduction of the Worldwide Harmonised Light Vehicle Test (WLTP), a new testing system for carbon dioxide (CO2) emissions. Even in the US, where economic data is more positive, the indication is that the market is slowing as the post-financial crisis stock has been replaced.

AUTO OUTLOOK POSITIVE

Longer-term, the drive for light-weighting in vehicles is likely to continue to push growth of plastics into automotive applications. Plastics Europe says that every kilogram of plastics replaces 1.5kg of traditional materials in a car.

Electrification is accelerating this trend for more plastics. A lighter vehicle allows better range or lower charging time, and also allows for a heavier battery, which again can extend range. In addition, plastics are being used in new components such as battery housings. As these are being designed from scratch, innovative materials can be used.

In the more distant future, autonomous vehicles (driverless cars) could change things further. For instance, safety standards may be relaxed, allowing for steel framework to be replaced by lighter plastics. In addition, changes in design could include a lower emphasis on visibility outside the car, and a greater emphasis on communication and entertainment in the vehicle.

3D printing of components could also be positive for styrenics, with ABS a key material for 3D printers.

As well as being driven by legislation and lack of consumer confidence, styrenics demand could also be impacted by the US sanctions on Iran. The sanctions started up on 4 November, and include petrochemical products as well as oil. This could lead to lower Iranian exports of PS, EPS and styrene. It could also lead to the delayed start-up of a new styrene plant in Iran. This plant, under development by Kian Petrochemicals, could struggle to find investment and an end market.

NEW CHINA CAPACITY

The majority of the new styrene coming onstream will be in China, where over 4m tonnes/year is forecast to start up from 2020-2021, and up to 8m tonnes/year over the mid-term. However, ICIS consultants believe that these plants will start up slower than many expect. Firstly, these projects have been repeatedly delayed. The managements of the companies have a vested interest in being optimistic on the start-up, hoping that it will discourage other late comers. At least one of these plants should be pushed back a couple of years.

Secondly, even when plants do open they may do so in a phased manner. Thirdly, if the new plants do all open, the resulting styrene glut in China could force older, smaller non-integrated plants to run slower or even close. Many of the new plants were built in partnership with planned coal-to-olefins units which were never built for economic reasons. These plants are now profitable but would be less so if prices were to fall.

As a result of the slower-than-expected start-up of China new capacity and worsening geo-politics, we believe that styrene supplies will improve only slowly, and the market may remain short in the near-term despite the weaker demand. Unplanned outages should continue and may impact the availability and pricing.

BENZENE LENGTHENS AS SUPPLY IMPROVES AND DEMAND SLOWS DOWN

AFTER HIGH prices on the back of styrene demand and low stock levels in late 2017, benzene markets have spent much of 2018 moving into a far lengthier position. This has been in response to linked market economics but also due to physical supply and demand.

Higher paraxylene (PX) margins have promoted benzene production, both from on-purpose reformate production, integrated transalkylation and standalone selective toluene disproportion (STDP) units. This has encouraged conversion of toluene to xylenes and benzene, even in standalone STDP units, adding to supply. On the other hand, relatively high toluene prices have meant that on-purpose production via toluene-disproportionation (TDP) and hydrodealkylation (HDA) has been limited by negative returns.

On the supply side, benzene capacity is expected to increase by around 2m tonnes by the end of 2018, compared with the start of 2017. This additional supply has been finding its way to the import markets of the US and Europe, as well as to China in 2018 so far. Much of this is integrated downstream, but a number of new (and restarted) units in Asia do not have integrated downstream benzene consumption.

This length in the markets has been put down to both increased supply as well as softer demand. So has the length been due to higher import availability?

2018 so far has seen Chinese imports (as per export party data, due to non-reporting from China) for both benzene and PX again exceed the levels recorded in recent years. Yearto- date imports of benzene into Europe are only marginally higher than over the same period in 2017. But with limited increase in demand in the region, as well as some unscheduled downstream outages, excess material did build up and material had to be moved to the US. In recent weeks, it has been internal movements and demand that have been affected by low water levels on the Rhine.

This has added to the volume of material that has been flowing to the US. Although some months have seen small decreases, overall benzene imports into the US in the first half of 2018 are estimated to be around 150,000 tonnes higher than in the same period in 2017.

That does have to be weighed up against the fact that 2017 imports were 300,000 tonnes lower than in 2016 – which we can put down to the large scale downstream outages seen in the first half of 2017. This build-up of length did not initially seem like an expected outcome, due to new derivative capacity, mainly in China, growth in downstream demand – again mainly in China but also other parts of Asia, alongside steady markets in Europe and North America. Additional product was expected to be absorbed without too much issue.

So what will happen in the short term? Production is likely to be cut back – whether from the PX market, where higher prices have affected downstream economics enough for demand to be cut back, or refineries where reformate production will decrease in Q4 for seasonal reasons and from maintenance shutdowns.

Over the longer term, the new mega- refinery and petrochemicals projects planned in China will bring fresh additional benzene capacity – and also expected derivative capacity – as shown in the chart above, which should theoretically account for the majority of this additional benzene. However, over the next five years, there are also a number of new capacities in Asia that as yet do not have any planned downstream capacity.

As shown, we expect much of the additional derivative capacity to lag benzene, but for most of the additional capacity to be absorbed over the next few years. However, in our current calculations, there will be over half a million tonnes of additional benzene that will need to find a home by 2022.

This additional capacity will add to recent non-integrated capacity in Asia, along with some units in Asia which have restarted recently, such as Jurong Aromatics’ facility (now ExxonMobil) in Singapore. This additional supply over the period to 2022 may not on its own mean that there will be cause for rationalisation of smaller aromatics units. However, coupled with what could be oversupply in the PX markets, such an outcome cannot be ruled out. Looking at PX, even if strong growth in polyester markets remain, larger units in southeast Asia and the Middle East that are focussed on supplying China may feel the pressure of oversupply over the next few years. ■

PICTURE CREDIT: Shutterstock