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Key Drivers - Aug 09,2012

Butadiene

Americas The US Final Base Contract Prices for butadiene for August, 2012 are $0.90 - 0.96/lb [$1984 - 2116/mt], FOB, no change from the Final Contract Prices in June.
Europe The July, 2012 Contract Price for butadiene is €1575/mt [approximately $1956/mt], delivered basis. This represents a €75/mt increase from the June Contract Price.
Asia Spot butadiene prices for August/September delivery are in the range of $2200 - 2300/mt, CFR China/Taiwan.
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Butadiene - Newsletter#: 638
Date: 08/09/2012

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Americas

After one major producer initially nominated a contract price increase for August, eventually all four major producers agreed to roll-over the July CP for August. So again the US Contract Price for butadiene for August will be at two different levels - three of the major producers with a base price of $0.90/lb [$1984/mt], FOB and one major producer at $0.96/lb [$2116/mt], FOB. These prices do not include surcharges. As a contrast to pricing shifts in Asia and Europe, the US market was very stable with very little change to the supply / demand balance and no apparent increase in demand. The spot price in Asia had jumped after a series of events including a major unplanned outage at Formosa in Taiwan. Asia buyers bid up the price to get surplus BD production from Europe. At the peak for July cargoes the price FOB Europe was in the range of $2100/mt, FOB basis. After a couple weeks the buying interest in Asia suddenly stopped, and European producers lowered selling ideas by at least $200/mt. During July and looking ahead to August North American buyers were well-supplied by contract tonnage scheduled from Europe, Brazil, and Korea and were not interested in any incremental tonnage at almost any price, let alone a price higher than the contract price. US/North American buyers have developed contract supply agreements that have largely replaced traditional spot sales. From Europe the sellers usually can command a higher price as the arbitrage is almost always a minimum of the freight differential between ARA and US/Mexican destinations. As we can see from the above chart, that differential is right at the minimum in August after the MCP in Europe settled higher in August. It is our understanding that at least two major butadiene producers in Europe and at least major BD trader have taken contract positions through 2012. With the start-up of the new BD plant at Triunfo, Brazil it is also our understanding that a monthly cargo will move to a Mexican consuming site for the rest of the year. The cargoes that normally ship from Korea to the US had created a short-term oversupply problem. The spike in demand from Chinese buyers provided an opportunity for the parties to divert some of the tonnage to China by mutual agreement and to the advantage of all. Traders are reporting that virtually no finished BD and very little crude C4 tonnage is available for spot export from Europe at this point. Crude C4 pricing is notionally in the range of 1.4 (x) NW European naphtha price, FOB or roughly $1500/mt, CFR basis. This would be a stretch for most US BD producers due to tight calculated margins, but at least one cargo will ship from Europe to the US during August. Most US BD producers are balanced on crude C4 supply with very little demand for incremental production this month. Operationally, North American crackers are running well, with only one unplanned outage in Port Arthur, TX still unresolved. Ethylene inventories were severely depleted during Q1 and Q2 planned maintenance, so cautious restocking and a push from rising feedstock costs will keep rates strong through Q3. BD producers should benefit from a more ratable supply of crude C4’s. Butadiene demand will probably stay flat for the balance of Q3 and even the rest of the year. The key seems to be that weak replacement tire sales have most dealers carrying very high inventories, which is hurting cash flow at these companies, regardless of size. Most tire dealers also provide routine auto maintenance service, which can usually carry them through periods like this. However, dealers are pushing back on tire suppliers, and tire producers will reduce production (and SBR/BR demand) accordingly (see comment on Goodyear below). Given this scenario, it is unlikely that synthetic rubber and BD prices will increase any time soon. The outlook for demand recovery for SR in 2012 is bleak. Goodyear announced that there was a substantial drop in Q2 sales volume and has decided to cut worldwide tire production by 5 million units during 2H 2012. In their Q2 earnings report, Goodyear said that Q2, 2012 sales volume was 3.7 million units lower than Q2, 2011, down 8.6%. In a pattern that is similar to the other major global tire producers, original equipment (OE) sales have increased helping to offset the much larger decline in replacement tire sales. The additional concern is that many global auto sales figures are wholesale data, and that a slowdown in retail sales would force auto producers to trim output during the balance of the year. Although styrene monomer prices are increasing in August, SR producers advise that the roll-over on BD prices and flat demand means that SR prices will also roll-over. Therefore, August SR prices will remain as follows: SBR 1502 - $1.25 – 1.30/lb [$2756 - 2866/mt]; SBR 1712 - $1.10 – 1.15/lb [$2425 - 2535/mt]; BR - $1.30 – 1.35/lb [$2866 - 2972/mt]

Europe

While the European regional economy is showing further signs of weakness and contraction, the energy sector has been surprisingly strong. North Sea dated crude oil was trading around $90/bbl toward the end of June and is now at $112/bbl – part of the increase is recovery from the bearish sentiment that sent prices to the bottom, but the turnaround is based on bits of speculation points ranging from lower inventories in the US, the ongoing issues with Iran and Syria, the recent strike by North Sea oil workers, etc. NW European naphtha has marched up along with crude, after hitting bottom around €600/mt, and now pushing €725/mt, a spike of 21% in a six week period. Cracker margins were obliterated in July with olefins and aromatics prices fixed in late June at the bottom of the cycle. In response European olefins, aromatics, and BD producers needed relief and were able to negotiate price increases across the board in spite of flat demand. Unfortunately energy prices have continued to move up after the August contract price settlements, and so the margin squeeze is still ongoing. Regardless of the justification, the €75/mt increase to the MCP for butadiene for August, which settled at €1575/mt [approximately $1959/mt], free delivered basis, has put both European BD producers and consumers in a less competitive position vs. Asia and the US, where prices have either moderated or stayed unchanged. For example, if the MCP was used as the basis for export pricing, the prices to Asia would be roughly $200/mt higher than buyers are now willing to pay. US buyers are similarly unwilling to pay above the US August contract price for incremental tons. Therefore the spot market has temporarily disappeared. The good news is that inventories of both finished BD and crude C4’s were cleaned out by the surge in BD exports to Asia during July at high prices. With cracker operating rates still struggling in the 75 – 80% range, there seems to be very little surplus of either product for export in August. As noted in the Americas section, some trade between Europe and the Americas (US and Mexico) is contract business. As we survey the range of contract BD business from the region, buyers are only taking contract minimum volumes. Maintenance outages at Sines and Tarragona reduced some export volume. Other planned maintenance coming along at Lavera, Porvoo, and Wesseling will keep C4 supply in check for the balance of Q3. Therefore, the European BD market will stay balanced with spot export pricing notional during August. If a surplus develops to the extent that traders can amass enough tonnage for an export cargo, it will be interesting to find out what level of pricing will motivate buyers in either Asia or North America to return to the market. With both butadiene and styrene prices moving up in August, synthetic rubber producers had no choice but to raise prices. That said, the arbitrage to Asia and the US for SR exports is virtually closed. Current synthetic rubber prices in August are in the following ranges: SBR1502 - €2025 – 2125/mt [approximately $2519/mt -or- $1.14/lb min]; SBR1723 - €1925 – 2025/mt [approximately $2394/mt -or- $1.08/lb min]; BR (tire) - €2150 – 2250/mt [approximately $2674/mt -or- $1.21/lb min]

Asia

In a common theme that is affecting the global petrochemical markets, Asian naphtha costs have increased dramatically since late June, essentially moving from $700/mt to $900/mt over the past six weeks. Furthermore, the supply of ethylene from the Middle East has been reduced by new derivative capacity in Saudi Arabia and trade sanctions on Iran. Add in the current slate of maintenance outages, and cracker rates from active operations are very solid. Korean crackers are running at 100%. In Taiwan CPC units are at 90% and Formosa’s #2 1000 kta cracker is expected to begin a TA in mid-August as the #1 unit restarts. Japan has three medium-sized crackers scheduled for maintenance this month, while Chinese operations at Qilu PC and Lanzhou PC will restart shortly, leaving only Panjin Ethylene and SABIC Tianjin PC down in August. The tightly balanced supply/demand has moved up ethylene prices, although propylene and butadiene prices have eased back down over the past couple weeks. If cracker margins continue to shrink it is possible that cracker operators will throttle back rates and ease up on the strong demand for naphtha. Under these recent conditions, the supply of C4’s has improved and the urgency that created the short-lived spike in spot BD prices went away. However, the balance could change if cracker rates are cut again as was the case in Q2. An indication of how the BD balances have ebbed and flowed is shown in the chart of Korean BD trade. In June, as expected, exports were stable (based in large part on contract sales to the US), but imports declined sharply as Korean synthetic rubber producers cut rates to lower bulging inventories. Although the July figures or BD are not yet available, there are reports that Korea’s trade balances generally declined, so BD imports probably have increased. Our conclusion about the Asia BD market, therefore, is that pricing is not likely to decrease further due to a solid cost floor but probably won’t increase either, as derivative markets are balanced and those prices are static, as well. In other words, we may see a flat spot on the price curve for a month or so (for the first time in several years). On the demand side, the global tire business will be watching China carefully to see how Chinese producers transition from a three-year period in which the US imposed additional import duties on Chinese passenger and light truck tires of 39%, 34%, and 29% sequentially. That directive will expire at the end of August, and the duties will revert to 4% in September. Although the additional tariffs were vigorously opposed by tire importers (dealers) in the US, it is uncertain as to what will happen next. Chinese tires exports to the US accounted over 45 million [light vehicle] tires in 2009 or approximately 15% of China’s total radial tire production. Then in the first full year of the additional tariffs, China’s exports to the US dropped to 35 million in 2010, but that was only 5% of China’s radial tire output. China clearly diversified its export market. The obvious conclusion is that the additional duties may have made some political statement but it did not hurt China’s tire industry. Over the past three years the market share for China for tire imports to the US plateaued at roughly 20% of passenger car tire and 26% of truck/bus tires, while the US increased imports from other countries, particularly Canada, Indonesia, Korea, et al. To cope with the additional tariffs, Chinese producers had to lower their prices, but only on a smaller percentage of their exports. Will they keep prices at the current levels, which could stimulate US demand and Chinese production, or will they raise prices and maintain the status quo on trade with the US? In either scenario, there could be some modest upside for Chinese tire companies. China’s tire business is certainly growing, although inventory management and cost control have been challenging. It appears that tire production will grow by 5% in 2012, and roughly ½ of that output will be exported. A combination of passenger car and truck/bus tire exports during the first half of 2012 totaled 87 million tires, a 10% increase over the same period in 2011. The decline in BD pricing has weighed on SR buying sentiment. Accordingly we have revised prices down by $100/mt from the last report in July. SBR 1502- $2700 – 2800/mt, CIF; SBR 1712 - $2500 – 2600/mt, CIF; BR (tire grade) - $3000 – 3100/mt, CIF

Current Prices

Butadiene

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Unit
RegionPeriodProductSpot LowSpot HighUnitContract LowContract HighUnitDescription
NA Oct 13 Butadiene 0.5200 0.5500 $/LB 0.4600 0.4900 $/LB 
  Oct 13 Butene-1   0.7950 0.8450 $/LB 
  Oct 13 Isobutylene   0.7050 0.7550 $/LB 
  Oct 13 Raffinate I   1,489 1,504 $/MT 
  Oct 13 Raffinate II   658 746 $/MT 
  Oct 13 SBR 1502   0.8450 0.8950 $/LB 
  Oct 13 SBR 1712   0.8050 0.8550 $/LB 
  Oct 13 Butadiene Rubber   0.8800 0.9300 $/LB 
WE Oct 13 Butadiene 668 718 €/MT 825 825 €/MT 
  Oct 13 Isobutylene   1,473 1,478 €/MT 
  Oct 13 Raffinate I   530 554 €/MT 
  Oct 13 Raffinate II   486 548 €/MT 
  Oct 13 SBR 1502   1,325 1,350 €/MT 
  Oct 13 SBR 1712   1,200 1,225 €/MT 
  Oct 13 Butadiene Rubber   1,450 1,475 €/MT 
AP Feb 10 Butadiene Taiwan   1,250 1,255 $/MT 
  Oct 13 Butadiene Korea 1,625 1,675 $/MT   
NA = North America, SA = South America, WE = West Europe, AP = Asia Pacific
Historical Pricing
 
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