Christopher Cothran, chemicals analyst, talks to leading butadiene expert Angie Joe about the Argus Butadiene Outlook:
• Market direction and underlying trends over the next 12 months
• Price and demand changes on the horizon, and how this is affecting producers, both regionally and globally
• Insights to help subscribers make better business decisions
This podcast is delivered by Argus’ butadiene experts using data and insight from the Argus Butadiene Outlook.
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Transcript
Chris: Hello, everyone. Thank you for joining us for this "Chemical Conversations Podcast." Today we'll discuss developments pertinent to the Argus Butadiene Outlook, I am Chris Cothran, an analyst in Houston, Texas for the Argus Chemicals Group and support the Argus Butadiene Outlook. Today I'll be speaking with Angie Joe, Argus's Vice President of C4 and the consulting lead on the Argus Butadiene Outlook and analytics products.
Angie, for the next few months for butadiene, in particular, but also C4, what do you see in terms of butadiene price and demand trends? And what's really keeping those trends going?
Angie: There's quite a bit going on in the world of butadiene. What I would say is we have two sides of the story. We have the macro factors and we have the fundamentals. From the macro perspective, it's the same thing as with every commodity out there, whether it is agriculture or chemicals or oil products, etc. But really that is global economic and inflationary fears. Also the COVID lockdowns and a weak housing market in China. There's less government money in the pockets of U.S. and European consumers, so they don't have as much funds to put toward durable goods, as well as a shift in behavior. We have more and more people traveling. We saw that this summer with some of the European airports canceling flights and restricting the number of passengers per flight because of the shortage of airline pilots and also support staff. And in addition to that, we have a return to work as opposed to work from home, as well as kids are back to school and back to school activities, after school activities. So, that's it from the macro side. That's quite a bit.
From the fundamental side, it's a really odd time and it's been an odd time for at least the last year where the U.S. has been the global price leader for butadiene. And that is a shift from what we know historically where Asia Pacific typically took the lead and all eyes were on Asia. We'll talk more about why that is, but yes, that definitely has had an impact in the short term.
Chris: How is this affecting producers and what butadiene is produced from and globally and regionally?
Angie: Right. So, butadiene is a co-product, meaning it is for the most part, not produced on purpose. There are a few ways to make it on purpose, but vast majority of butadiene is produced via an ethylene cracker. And one of the struggles that we've seen since let's call it early summer, we saw signals from Asia of very tight ethylene cracker margins because of weak derivative demand from the ethylene and propylene segments. And let's face it, butadiene...actually, cracker operating rates are driven by ethylene demand and not butadiene or other coproducts demand. So, butadiene is at the mercy of ethylene, and it always has been, and it will be until there's more ways to produce BD on purpose, economically.
So, what we're seeing is globally cracker operators have cut back on operating rates. And again, this is due to weak ethylene and propylene margins. So, as a result of lower cracker operating rates, what happens is, is there's less feedstock crude C4. And crude C4 is how butadiene is produced. So, that has certainly helped in propping up prices globally for butadiene, particularly in the U.S. and in Europe. Asia was the first to lower operating rates, let's call it early summer or even late spring. And in the past, what we've seen when cracker operators in Asia have lowered rates is the BD to nap the spread in Asia was quick to bounce back, usually within a few weeks time, maybe a month. But as I've mentioned, Asian crackers have been running at reduced rates since early summer. So, it's been months. And that has been very confusing to the market because no one knows how long this will last, or if there is a new normal, and there's just really not a lot of guidance.
We have seen very, very recently an uptake in Asian prices, but it's still questionable whether or not this is just temporary or if it has some legs to it. Looking over to Europe, some believe that cracker operators are running at about 70% or even lower, whereas in the U.S. crackers are probably running in the mid to high 70% operating rates. So, again, this is why we have less crude C4 globally, and maybe what you would say higher than expected BD prices in the U.S. and Europe.
Chris: What's it gonna look like for supply and demand on the horizon? What do you see in terms of responses to some of these conditions and the impacts on economics?
Angie: What I would say right now for Asia which is troublesome for that region is managing supply demand. It sounds obvious, but the reality is that BD supply has been much quicker to start up relative to new derivative projects. And we've seen this in the past, for example, when this came in to the U.S., we saw crackers starting up much quicker than derivatives. And so, this is nothing new. But in particular, at the moment we have low nitrile rubber latex, which is primarily used for rubber gloves, and also low ABS demand, Acrylonitrile butadiene styrene. And ABS goes into a number of segments. It can go into wide appliances, washer dryers, dishwashers, refrigerators. It can also go into medical equipment. It goes into toys and several other items. It's really a good indicator of what consumer demand looks like because there are so many segments that ABS goes into.
But the bottom line is these two sectors, nitrile rubber latex, and ABS account for probably the top two of three growth areas in terms of new projects. But eventually, I am optimistic that these derivatives will come on stream, and this will, of course, help absorb this BD supply. In Europe, the struggle is high natural gas costs, particularly as we move into the winter we saw elevated prices even in the summer months, but we anticipate that there could be potential for high prices into the winter again. Although there is a possibility that Europe is prepared enough for the winter. But in any case, assuming that natural gas prices are high this winter and there's just not enough supply, the real struggle for BD producers in Europe is how to pass through these costs into the monthly contract price discussions. And what we've seen in the past year is that producers unfortunately have not been able to fully recover those costs. And really, the price driver, when the MCP went up, has been more on supply-demand rather than implementing energy cost. And it's also frustrating for BD producers because several of the derivative producers have implemented their own surcharges across the rubber and styrene block copolymer chains. So, we see that happening in the derivatives, but not in the monomer.
The other thing that's interesting is the shortfall from Russian imports into Europe. And the biggest case as it relates to the C4 chain is high-cis PBR. And there is a major shortfall of high-cis PBR in the region. And as a result of this, we see Synthos, which is based in Poland, they've announced an expansion and also a restart of an idle unit to compensate for the loss. And we'll see this BD demand surface by the end of the year and into Q1. But at the same time, you have Synthos and other rubber producers who are scaling back on emulsion styrene butadiene rubber production because of high utility costs. So, it's limited in terms of what has strong demand in Europe versus weak demand.
Chris: Looking at the prices for three key regions of the U.S. or Americas Northeast Asia, and Europe. There's an apparent disparity of prices that has emerged, particularly I've noticed in mid-2022 and persisted. The U.S. contract price is currently above Asia and Europe prices. This apparent separation wasn't always the case. What supports the U.S. price elevation in particular? Can you provide other insights on those prices?
Angie: We'd really have to go back to February 2021 to answer this question properly. Back then, if you recall, there was an unprecedented winter freeze along the Texas Gulf Coast. I believe they called it Uri. And this storm had such frigid temperatures that it knocked off some crackers offline and BD units for as long as two months. And so, one thing to keep in mind is that the BD assets and cracker assets here along the Gulf coast, whether it's Texas or Louisiana, they're not built to withstand these harsh winter temperatures. They are built more for high heat temperatures and hurricanes, right? Not necessarily harsh winter temperatures. So, this was the start of an influx of imports into the U.S. And so, eventually, it looked like things were turning to a more balanced date as we approached the end of '21 and early '22. But then what happened was, is the Americas was slated for a very heavy turnaround season, starting in late Q1 and into Q2 of 2022. That included five BD units along with a major import terminal in the Houston area.
The original plan was actually to have six BD units that were to undergo repairs, but one of these units actually delayed their maintenance to Q1 of 2023. But still five BD units is quite a bit of maintenance. And then along with this maintenance is that some of these facilities had delayed restarts due to technical issues, or perhaps staffing issues, or delays in shipping logistics for parts. So, again, that did not help. And on top of that, we have U.S. cracker operators who started to run a much lighter feed slate than what they originally anticipated. So what happens is, is cracker operators have a plan of how they think they will run for the year. And this is finalized in the previous year. And when you look at that plan, the U.S. cracker operators were running lighter than what they had originally anticipated for the year. And so, that meant less C4s. So, between the turnarounds, the BD turnarounds, as well as running a lighter feed slate, that meant there were allocations basically for most of this year. September will mark the first time this year, since February, that there have been no allocations on term volumes to consumers here in the U.S.
Now, that supply situation is finally starting to ease. However, there are still import barriers to the U.S. There are very few consumers who can take a 5KT parcel all in one shipment and some consumers don't necessarily have the storage or the logistics to import on their own. So, they need the assistance. And in addition to that, there are very stringent requirements on the U.S. BD pipeline system. And it specifies that the BD content and other specifications need to meet a certain quality in order to be accepted. So, as such, what we could see is an elevated U.S. CP over a more prolonged period than what was anticipated.
Chris: Thank you, Angie, for your industry insight on this. And thank everyone for tuning in to this "Argus Chemicals Conversation Podcast."
This podcast is delivered by Argus’ butadiene experts using data and insight from the Argus Butadiene Outlook.
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