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May 22, 2020Rationalisation becomes a theme as styrenics remain under pressure
The styrenics sector is under pressure from weak economics as a number of factors weigh heavily on styrene monomer and its derivatives. As a result styrene producers are under increasing pressure from rationalisation and reduced operating rates as producers readjust to the weak demand environment. A rise in imports and weak demand have weighed on the European market, resulting in a growing disconnect between the spot and the industry-settled contract prices. In response, buyers pushed for amendments to 2020 contract formulas to reflect more spot pricing elements. As the industry seeks to remain profitable its production technologies and methods have come into view.
Introduction
Styrene monomer is used in a broad range of polymer derivatives, ranging from commodity polymers to engineering plastics and synthetic rubber, namely polystyrene, expandable polystyrene (EPS), acrylonitrile butadiene styrene (ABS), styrene acrylonitrile (SAN), styrene butadiene rubber (SBR), styrene butadiene latex (SBL), and other copolymer resins.
Styrene imports lengthen European supply
European styrene supplies have been ample following the surge of imports.
Imports from key regions United States, Saudi Arabia and Russia totalling 743 000 tons arrived between January and December 2019, an increase of 35 percent or 194 000 tons compared with the same period in 2018, according to the latest TDM data. The rise in imports in 2018 was driven primarily by antidumping duties (ADDs) imposed on Chinese styrene imports from the United States, Taiwan and South Korea in the second half of 2018, resulting in new trade routes. U.S. imports have been the most significant factor, rising 70 percent year on year to 473 000 tons from 279 000 tons in 2018.
European imports from key regions surge
European exports to China limited
European exports to key destination China fell in 2019 as economic uncertainty hampered demand. Subsequently the need for European styrene waned resulting in less European styrene exports to China.
European 2019 exports between to China fell 43 percent to 122 000 tons from 214 00 tons in 2018.
China, the largest importer of styrene in Asia, is expected to significantly reduce its imports, with new supply slated to start in the near and long term. New Chinese styrene capacity has led to increased self-sufficiency and thus the EU-China trade flow route that emerged in the second half of 2018 has gradually declined.
Increased styrene availability will put pressure on European producers as “reduced global styrene capacity” is in need according to market participants.
Increased self-sufficiency in China has also hit global demand and pressured spot pricing in Europe. New capacity in China is expected to reduce the country’s reliance on imports and ultimately curtail demand for European styrene cargoes.
Benzene volatility impacts styrene prices
Styrene is derived from benzene and ethylene; however, benzene is the main feedstock, accounting for approximately 79 percent of its molecules. Benzene prices have been volatile during 2019 and in the first quarter of 2020uoyed by production issues that tightened prompt availability, lack of imports and volatility in the upstream energy complex.
Benzene price movements have been a key determinant for the styrene contract settlement as contract counterparties account for feedstock cost increases.
The styrene-benzene spread remains well below the breakeven level of $250 per ton.
Styrene buyers rethink contract pricing as spot-to-contract discounts widen
Styrene buyers have altered conventional habits amid widening spread between contract and spot pricing as following a bearish year for the petrochemicals industry.
A rise in European styrene imports and weak demand weighed on the European spot market in 2019, resulting in a growing disconnect between the spot and the industry settled contract price. In response, buyers have pushed for amendments to future contract formulas to reflect more spot pricing elements.
Styrene contract volumes are typically negotiated annually, with pricing determined monthly through the industry contract price (CP) mechanism, usually at a pre-agreed discount expressed as the CP minus a fixed percentage. Participants look to the relationship between spot and contract prices throughout the year as a measure of relevance for these contractually agreed discounts.
In 2017, 2018 and 2019, spot styrene prices averaged around 12 percent, 14 percent and 17 percent below contract settlement prices respectively, whereas the 2020 average between January and February stood at 25 percent.
Negotiated contract discounts were said to be in a 12 to 15 percent range in 2019, with buyers seeking wider discounts in 2020.
The current push for greater discounts is a function of a variety of factors. First, the European styrene market has been largely bearish since the second quarter of 2019, following an influx of US imports, as market participants sought to bolster inventory levels amid a spate of European maintenance.
At the same time, polystyrene demand has tapered off with market participants relying on material purchased earlier in the year. Furthermore buyers look to other polymers less exposed to price volatility and deemed more recyclable amid the impending European ban on single use plastics in 2021.
Polystyrene popularity in Europe has been fallen in recent years as regulations and consumer sentiment has shifted towards promoting plastic alternatives or more widely recycled polymers.
ABS and SBR demand has been sapped by weak end-user consumption, particularly from the automotive and tyre sectors.
Rationalisation becomes a growing possibility
In March, Trinseo initiated a consultation process with the Economic Council and Works Councils of Trinseo Deutschland regarding the disposition of its styrene monomer assets in Boehlen, Germany and its polybutadiene rubber assets in Schkopau, Germany.
The combined adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of these operations in 2019 came to a negative $14.6m.
The styrene facility has capacity of about 300 000 tons per year. However, average production over the past three years was about 200 000 tons per year below capacity due to several factors, including upstream supply issues. In 2019, production was about 150 000 tons per year, reflecting the previously disclosed unplanned outages.
As a result, rationalisation has become an ever growing possibility as European producers readjust to the weak environment.
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