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html Oversupply, soaring production costs and lackluster margins still loom large but Styrolution is optimistic for the future After a sustained period of volatility in the global styrene market, the coming years promise improved stability, although the sector still faces significant challenges. Pugh sees higher rates Speaking at November's European Aromatics & Derivatives Conference in Amsterdam, the Netherlands, Martin Pugh - president Europe, the Middle East and Africa at Frankfurt-headquartered producer Styrolution - said styrene is undergoing a significant shift, with demand growth likely to overtake capacity additions in the next three years. This, he said, will lead to operating rates gradually returning to around 90% from the 80% level seen since the end of 2008 as a result of the economic downturn. The styrenics major - a 6.4bn ($8.5bn) turnover, 50:50 joint venture between Germany's BASF and Switzerland-headquartered INEOS - was formed on October 1, 2011. Pugh added that global styrene demand growth forecasts have been reduced to 3.3% from previous expectations closer to 4%, but growth levels vary between the different downstream sectors. In his estimates for future supply and demand worldwide, Pugh factored in an additional 1m tonnes/year of new styrene capacity globally for 2014, plus 500,000 tonnes/year for 2015. He stressed that this extra capacity is unannounced at present, and if it does not materialize, then styrene operating rates will rise quickly. "We do see operating rates increasing in the next few years," he said. "It takes at least three years to build a new plant, so better times are coming for the styrene industry." Pugh's belief is that most of the new capacity will be on-purpose styrene production, rather than, for example, from propylene oxide/styrene monomer (PO/SM). He also noted that the pipeline of new projects in Asia and the Middle East in 20132015 is smaller than that of previous periods. Asia is structurally short and the Middle East will remain a primary exporter to the region. TURBULENT TIMES Soon after the start of the global economic crisis in 2008, the rising price of crude oil and naphtha heaped pressure on styrene spot markets and saw the monomer's values soar. By mid-2008, prices had climbed above $1,800/tonne FOB (free on board) Rotterdam in Europe, to the mid-$1,600s/tonne FOB Asia and the high-$1,600s/tonne FOB export in the US. By the end of the year, prices had softened considerably, retreating to around $600/tonne in each region. Asian aromatics producers were struggling in June 2008 and some reformer operators were considering the closure of their facilities because of the soaring costs. Increased demand for derivatives such as expandable polystyrene (EPS) following an earthquake in Sichuan, China, a month earlier caused styrene prices to rise further. The unexpected surge in EPS requirements following a government reconstruction program helped to heap another 10% on to styrene prices within a few weeks, taking the range to $1,665-1,675/tonne CFR (cost and freight) China. The rocketing price of styrene's other key feedstock, ethylene, exacerbated the situation, the olefin reaching a

16-year high of $1,630-1,670/tonne at the end of June. Meanwhile, naphtha had climbed to a new record high, breaching $1,200/tonne CFR Japan because of higher crude. In Europe, the profitability of the styrenics chain was called into question owing to poor margins and depressed demand in the summer of 2008. Since the settlement of secondquarter ethylene contracts, monthly styrene had leapt by an average 110/tonne, with June pegged at 1,145-1,190/tonne FD NWE (Northwest Europe). One producer also noted the 97/tonne hike for benzene and record high energy costs meant it was unable to cover its production costs. Many sellers were forced to reduce output as a result. There was also widespread concern by the end of June that European styrene would tighten and prices move even higher with US major Dow Chemical's plans to limit its production by up to 40%. In July 2008, spot styrene reached $1,790-1,808/tonne FOB Rotterdam. With Europe dry, many players at the time were starting to eye arbitrage opportunities from the US - some suggesting it was out of necessity because of the lack of material in Europe as much as for financial reasons. A few months later in September, as prices started to soften in Europe, US spot values peaked at $1,686-1,752/tonne FOB export. Pugh added that within Europe, production outages and import delays have also meant that styrene has a life of its own when it comes to price volatility. November 2011 has seen the highest spread between European benzene and styrene levels since 2002, as prompt tightness for styrene drove up pricing while benzene dropped to a 14-month low on weak demand from key downstream markets and macroeconomic uncertainty. Another challenge facing the styrenics sector, according to Pugh, is the difficulty in passing on butadiene (BD) costs to customers. BD, which has seen extremely volatile pricing and is expected to remain in short supply, is used in the production of highimpact polystyrene (HIPS). Pugh said that BD accounts for 15-20% of the cost of making HIPS. The global polystyrene (PS) market, where growth is forecast at just 3%/year, faces several challenges. Europe is still struggling with oversupply despite a 25% capacity reduction over the past five to six years. Pugh estimates that 10% of European capacity (200,000 tonnes/year) is unused, and he expects over time there will be more closures for PS. "Demand for PS in Europe is flat to slowly declining by 1%/year, so there will be pressure on producers going forward," Pugh said. In addition, there is a further 400,000 tonnes/year of capacity that will come on stream in the Middle East and Africa in the first quarter of 2012, which will hit Europe's export business to Turkey and Africa, as well as domestic demand. PROJECT STARTUPS Egyptian Styrenics was due to start trial production at its 200,000 tonne/year PS plant in Alexandria, Egypt, this quarter. Saudi Polymers - a joint venture between Arabian Chevron Phillips Petrochemical and National Petrochemical - was also on track to start up its 200,000 tonne/year PS plant in Al-Jubail, Saudi Arabia, early in the fourth quarter. The low volume of recycled PS also poses a challenge, with Pugh arguing that the industry needs to find bigger markets to cultivate additional growth for the polymer. He said that only 30,000 tonnes/year of PS is recycled, mostly originating from the refrigeration sector, through collection schemes.

Other derivative markets such as EPS and acrylonitrile-butadiene-styrene (ABS) may expect to see annual global growth rates of up to 5-6% from now until 2014. For Europe's ABS market, rising capacities in the Middle East and Asia, as well as the EU/South Korea free trade agreement, present challenges for growth. Asian ABS capacity accounts for 80% of global ouput, which stands at 9.1m tonnes (2011). China accounts for 31% of capacity, followed by South Korea with 18% and Taiwan with 17%. Europe and North America account for 8% each of world capacity. Pugh said that ABS production capacity in Asia, mainly China, is expected to rise by 500,000 tonnes/year in 2011-2012. Competition from other polymers such as polyethylene terephthalate (PET) and polypropylene (PP), and imports of semi-finished products, such as PET from the Middle East, meat trays from Brazil, as well as pencils and CD boxes from Asia, are another challenge for the PS industry. In Pugh's view, styrene will be more balanced in the coming five years although he expects that the industry will continue to be extremely volatile. "Management of volatility is critical for future success. Proximity of plants close to customer markets is critical as is management of cyclicality. Also, companies must have a sustainable pricing strategy," Pugh said. Economies of scale and highly efficient commodity polymer plants are important for a sustainable future, he added. CARCINOGENIC CONCERNS Delegates raised the issue of styrene being listed as "reasonably anticipated to be a human carcinogen" by the US Toxicology Progam. This listing is being challenged in court by the US Styrene Information and Research Council. Europe faces similar challenges following a Proposal for Harmonised Classification and Labelling. Denmark and Sweden are pushing for styrene to be awarded CMR (Carcinogenic, Mutagenic, Reprotoxic) 1b status in Europe. Pugh said that the impact on demand was difficult to gauge, but stressed that the industry needed to "get on the front foot." "We have got to vigorously defend the situation," said Pugh. "We do not agree with the US listing of styrene. It's an irrational decision that's not being made on the basis of scientific data." "This industry needs to be much more proactive," he added. "We have so many great stories to tell on plastics but we have not done a great job. We have got to find supporters in the downstream businesses and we have to change the minds of naysayers." Additional reporting by Truong Mellor in London Author: Elaine Burridge and Andy Brice