How did the US butadiene market become the global price leader and how long will this trend continue?
In a twist, US butadiene (BD) prices are the highest globally because of ongoing supply constraints, planned and unplanned cracker maintenance globally and strong demand. Typically the world market looks to Asia for price direction. But North America has yet to fully recover from a mid-February winter storm that unexpectedly shut US Gulf Coast BD production for several weeks. As such, the US has purchased spot volumes primarily from Europe but also Asia-Pacific. This, in turn, has supported higher prices in other regions.
In this episode of Chemical Conversations, Ron Baughman and Angie Joe walk listeners through the developments leading up to current conditions and take a peak to see what lies ahead.
Ron: Hello and welcome to ‘Chemical Conversations.’ In today’s episode, we will be discussing current and forward pricing for the global butadiene market. The latest view is part of the five-year price outlook, which is published once a year across all of petrochemical services. Typically our forecast spans across 24-months.
‘Chemical Conversations’ is brought to you by Argus Media — a leading independent provider of energy and commodity market information. My name is Ron Baughman, and I am the new US propylene consultant here at Argus. With me today is Angie Joe, who is our lead butadiene consultant.
Angie: Thanks, Ron. I’m happy to be here. Before we get started on butadiene, I’d like to introduce our audience to you.
Ron Baughman has more than 35 impressive years in the petrochemical industry, ranging from NGLs to crackers to developing propylene compounds for industrial or consumer applications. He’s held technical, commercial, product management, purchasing and manufacturing roles with companies such as Huntsman, Basell Polyolefins, A. Schulman and General Motors. Ron has a chemical engineering degree from Case Western Reserve University and an MBA from Kent State. We are so very pleased to welcome him to the Argus petrochemical team!
Ron: Thanks, Angie, for that intro.Shall we get right to it?
Angie: Let’s do it.
Ron: Can you please explain to us what is happening in the US butadiene market? Why have spot and contract prices risen so much in recent months? What’s going on?
Angie: The butadiene market is confronting the worst combination: tight supply in the face of strong demand.
The US still has yet to recover from the automotive and tire shutdowns of March and April 2020. To start this year, the market approached a balanced state. Unfortunately the February storm erased any progress that had been made. For the last four months, consumers have struggled with ongoing supply constraints after almost three-fourths of US butadiene (BD) capacity was shut down for up to eight weeks. Even today, a few producers are struggling to return to normal rates. The US BD CP is poised to jump almost 75pc in July compared to March.
At the same time, demand has been exceptional. Tire producers cannot rebuild inventories, and strong orders will go through the end of the year and beyond.
Ron: Isn’t there a new crude C4 to butadiene tolling arrangement in Texas that has lifted BD production?
Angie: Yes, an announcement was made although this relationship has yet to come to full realization. We anticipate more US BD production at the end of the year or even first half of 2022. This supply boost will eventually provide greater flexibility to cracker operators in the flow and processing of crude C4.
As background, in November 2019 TPC was forced to permanently shut its Port Neches, Texas, BD unit because of a major fire. Since then, there have been logistical challenges in the flow of crude C4. At least one cracker operator has been co-cracking since that time because its only option was to pipe crude C4 to TPC’s Port Neches facility. Another cracker was forced to move crude C4 by barge rather than pipe. Others built in co-cracking capabilities to manage supply. Immediately after the TPC incident, the market focused on the available nameplate BD capacity. We quickly came to the realization that the real story was behind crude C4 logistics.
Ron: What is your biggest concern in the months ahead?
Angie: Well, Ron, hurricane season commenced on June 1st. Those of us based on the US Gulf Coast know that the chances for a hurricane that could move through south Texas or Louisiana are very high. August through October typically marks the peak of the season. Let us not forget that in August 2020 southeast Texas and southwest Louisiana were hit by back-to-back hurricanes. Furthermore, there are at least two planned BD turnarounds scheduled during these three active storm months.
US producers and consumers have no safety stock built up, so a supply disruption for even just a few days could force them to reduce operations.
Ron: When will US prices finally begin to drop?
Angie: Our scenario accounts for one major hurricane that will force cracker and BD producers to shut down. Generally, derivative plants have an easier time in restarting and resuming normal rates. That said, we could see a contango price curve through most of the year. Argus has built in a decrease in December when producers and consumers in Texas typically destock to avoid inventory taxes. However we are advising clients to build in an alternative scenario that accounts for a rise in prices through the first quarter.
Ron: Doesn’t the world typically look to Asia for price direction? If so, why is it that spot BD in Northeast Asia the lowest globally?
Angie: US buyers have a clear preference for imported European origin BD, relative to Asian cargoes. BD from Europe has a lower dimer content, and the US has a 25pc import duty on China origin material. Plus freight rates from northeast Asia to the US are higher. With that, the US has paid a roughly $500/t premium for northwest European cargoes. This has created a gap between Europe and Asia-Pacific that opens an arbitrage window, at least on paper.
Some BD producers in South Korea can meet US specifications. But currently South Korea has little to no volumes available for export. The best bet for spot supply is China. But most US consumers don’t want to accept the high dimer content – much less pay the import duty. In addition, northeast Asia has a number of new BD units that are due to start up into the second half of the year, so this is holding regional pricing down.
Ron: I understand the spread between US contract price and the European monthly contract price keeps widening. Can you explain why this is occurring?
Angie: This issue is a growing problem. From March to April, the delta nearly doubled to around $240/t. In May and June, the spread was around $300/t. We anticipate the spread between the US contract price (CP) and the European monthly contract price (MCP) to exceed $400/t in the short term. This will last until America’s buying appetite is curbed. The highest previous peak was in October 2018 at just under $350/t. During this time, US rubber producers said their cost to produce domestically was higher than a European rubber producer’s delivered price. In 2019 the range averaged just under $120/t.
The US CP to European MCP spread is calculated by accounting for contractual discounts in both regions and current exchange rates.
If the delta does not narrow, it could eventually result in demand destruction in the US. Derivative production could slow, planned end user expansions may get canceled and/or there is a possibility of more tariffs imposed by the US. If the CP to MCP spread continues to average in excess of $150-200 after the container shortages are resolved, then it will hurt demand growth for the region.
Many issues are masked by the container shortage. Tire producers and acrylonitrile butadiene styrene, or ABS, consumers cannot get imports because of high freight rates and shipping delays. This is why we are not seeing a flood of derivative imports of synthetic rubber and ABS in particular. Once the container situation normalizes, probably sometime in 2022, it could have a ripple effect and bring demand down.
Ron: What about the US’ proposed anti-dumping duty on Asian tire imports from Thailand, Vietnam, South Korea and Taiwan? How will that affect the market?
Angie: Before we get into current conditions, let’s chat about what happened in 2015 when the US imposed duties on Chinese tire imports. The year-on-year imports of China origin tires dropped by 31pc in 2016 (the first year); 35pc in 2017; 19pc in 2018; and 67pc in 2019.
Meanwhile, Chinese tire manufacturers looked elsewhere to build capacity, including Thailand and Vietnam. Imports to the US resumed in 2017. As reference, exports from Thailand climbed an amazing 57pc from 2016 to 2019.
Similar to the Chinese tire duties, we don’t anticipate a visible change until two to five years out.
We believe there will be an increase in tire production from the Americas, which would draw in part on regional rubber supply. Yet, at the moment, no new rubber expansions have been announced. It is likely that the market is taking a conservative approach. The memory of automotive and tire plant shutdowns in the second and third quarters of 2020 is not so distant.
Ron: Angie, I know we have to draw to a close now. It's been a pleasure talking and thanks to everyone for listening in. If you enjoyed this podcast, please be sure to tune in for other episodes in our series, ‘Chemical Conversations’ by Argus Media. For more information on Argus Butadiene coverage, please visit argusmedia.com/petrochemicals.
Angie: Thanks everyone. Be well and stay safe.