Viewpoint: Europe styrene grapples with oversupply

The styrene market in Europe will remain under pressure from supply length in 2020 as new capacity in China is brought on stream at a time of a slowing global economy.

No major styrene turnarounds are planned in Europe or the US in the first half of 2020. US imports into northwest Europe have doubled to around 40,000 t/month in 2019 and this could further increase in the coming year. Europe became an alternative destination for US styrene as a result of the high tariff walls erected by China on US imports as the trade war escalated. An easing of US-China tension is unlikely to lead to a dramatic shift in trade flows as US styrene continues to face anti-dumping duties and tariffs that are unlikely to be removed in the near term.

Two new styrene plants, with capacities of 720,000 t/yr and 600,000 t/yr, are expected to come online in China in the first quarter, with a further 2mn t/yr projected to follow later in the year. Another 3mn t/yr of styrene is scheduled to start up in 2021 as part of the Chinese government's large-scale programme to increase the country's self-sufficiency in the supply of petrochemical products. Growing price pressure will curtail Europe's ability to export surplus styrene, which has been moving in increasing volumes to China to fill the gap left by US imports since last year.

Styrene producers, particularly non-integrated units, will be left with no option but to operate at reduced rates. Most are aligning output with contractual commitments, which are also being reduced, as consumers shift a portion of supply towards the spot market. The expected stock rebuilding by consumers at the start of the new year, after ending 2019 with low inventories, will provide some respite to producers. But stocking up efforts will probably be moderate as the industry remains cautious about how the economy will develop as 2020 progresses.

Many consumers down the polymers chain are struggling as the global economy slows and environmental regulations tighten. The growth outlook in the European economy is weak, while the domestic polystyrene market has been shrinking by 2pc/yr for nearly two decades. The rate of decline is probably accelerating, particularly in the packaging segment, where recycling concerns are pushing consumers to alternative materials such as polyethylene terephthalate (PET) or paper. Prospects for the expanded polystyrene market depend heavily on construction activity, which is affected by seasonal factors and wider economic conditions. Other derivatives such as acrylonitrile butadiene styrene (ABS) and styrene butadiene rubber (SBR) are heavily dependent on the automotive sector which, although showing signs of bottoming out, is expected to remain depressed in 2020. Derivatives usage in the electronics sector should grow modestly.

Most styrene consumers are leaving more businesses open to spot negotiations because of the heavy discounts commanded by spot prices — which are reflecting the immediate impact of increasing imports — over contract values. Buyers are generally cutting their contract commitments for 2020 to around 60-70pc of 2019 levels, leaving producers vulnerable to the price volatility in the spot market. This has already prompted some styrene producers to curb operating rates and buy spot product instead in the latter part of 2019.

A relatively firm feedstock benzene environment will create further margin pressure on styrene production in Europe. The upward momentum in crude and naphtha values, along with supply curbs arising from tight pygas availability and turnarounds at extraction units, will underpin benzene in the first quarter. But the upside will be tempered by reduced consumption as ethylbenzene/styrene operating rates are scaled back. Styrene is the largest benzene consumer in Europe, absorbing 45pc of production. Benzene demand for cumene/phenol is constrained by structural length in the market for co-product acetone. Demand in the nylon chain, affecting cyclohexane and phenol, is affected by the weak state of the automotive market. Polyurethanes growth has been affected by the general economic slowdown and aniline demand is not expected to grow strongly.

Margins have weakened, with styrene's premium to naphtha averaging $463/t and to benzene $272/t in 2019. The outlook for 2020 is unlikely to show a significant improvement from this year. The premium averaged $657/t for naphtha and $360/t for benzene over a five-year period to 2018.

By Monicca Egoy