HOUSTON—In this bizarre year that is 2020, the synthetic rubber market and materials that feed it are no different than most other industry sectors.
The coronavirus global pandemic has wreaked havoc with the fundamental drivers, and it may be years before some market levels rebound to pre-COVID-19 levels.
That was the message put forth by Bill Hyde, an analyst with IHS Markit, during a presentation Sept. 18 during the International Tire Exhibition & Conference.
"Let's hope 2020 is remembered as a statistical anomaly, and something of a disaster," said Hyde, who leads the IHS Markit group focused on analyzing markets related to C4 olefins, synthetic and natural rubber, and tire raw materials. He delivered his talk virtually from his home in Houston.
He said that in some markets key to tire production indices—including the U.S., Japan and China—light vehicle sales dropped sharply, led first by China and followed by the rest of the world. There was a nice rebound, but as auto sales started to level out somewhat, they did so at a level that was lower than pre-COVID numbers.
Hyde called it the worst recession in decades, and IHS Markit still isn't at a point where it can say with any real certainty what the total drop in the global GDP will be for the year. The current view suggests that the world GDP will fall 5 percent for 2020, with the U.S. down a little more than 6 percent and the European region down more than 8 percent.
"China will continue growth, but at less than 1 percent," he said. "China has been in about the 6 percent range (recently), and coming to something that is that low is a real shock to the entire system."
There is an expectation, Hyde said, that there will be a significant rebound to those economies, but that forecast is made with the assumption that there won't be another major pullback because of a resurgence of the virus in the last part of 2020, and that there will be an effective vaccine available in the first part of next year.
"Our view is that the world bounces back a little better than 4 percent," he said. "The U.S., regardless of the outcome of the election, will have growth in the upper 3 percent range. The Euro Zone will be a little better than 4 percent, and China pushing 8 percent."
The outlook isn't as good for light vehicle sales. He said the drop was even steeper than the Great Recession numbers of 2008-10, and it will be years before vehicle sales match those of 2017-18. The projection is that China will be back to its peak around 2024-25, the U.S. by 2026-27 and Western Europe not until after 2030.
While butadiene and styrene are key monomers for synthetic rubber, Hyde spent a good deal of time talking about ethylene conditions, because the two monomers are produced as by-products of ethylene and thus are tied to its market condition.
Ethylene's demand is primarily in non-durables and packaging, so it hasn't seen the negative impact that materials tied to the automotive market have suffered. "So ethylene production globally has stayed relatively strong," he said. "But regional distribution has changed somewhat."
That is because ethylene can be made from a number of different feedstocks. In some areas, ethylene is more crude-oil based, while in other regions—such as the U.S. and Middle East—it tends to be more natural gas-based.
"U.S. ethylene producers have benefited greatly from low natural gas prices over the last 10 years, and the losers from that trend have been ethylene producers in Western Europe and Northeast Asia, where they tend to be more focused on crude oil supply changes," Hyde said. "This year, when oil prices dropped and natural gas prices didn't, the competitiveness flipped. We saw strong ethylene production in Western Europe and Asia, and less so in the U.S."
The analyst does expect the price dynamics to work their way back to traditional levels at some point, but in the meantime that will cause friction between the different regional producers "before clear winners and losers emerge."
There is a good deal of ethylene production slated to come online in the coming several years. In the U.S., for example, there was no new ethylene units built from 2000 to 2017, but since then Hyde said there have been five or six added in a first wave of expansion, and another two or three more crackers set to start up over the next couple of years.
"A third wave is being developed, but the projects are being delayed as companies are looking at where the equilibrium level is going to be between oil and natural gas-based feedstocks," he said.
In China, where ethylene production is based on a wider variety of feedstocks, nearly 20 projects are expected to start in the next three to four years. Hyde said there isn't a need for this much new material to hit the market, noting that the amount of ethylene capacity being added in China exceeds the projected demand growth over that time period for the entire world.
"Why is (China) doing that? They're doing that because they have been and continue to be a significant importer of ethylene and ethylene derivatives, and they're marching toward a self-sufficient market balance," he said. "So the rest of the world kind of has to respond to that."
Butadiene, styrene trends
China drives the butadiene market, with more than 60 percent of the planned butadiene capacity expansion projects set to happen from 2018-23, according to the IHS Markit analyst. Demand growth projected for China is even greater than the amount the global market is expected to increase, because projections are for the markets in North America, Western Europe and the rest of Northeast Asia to fall a bit.
"China also is the most important short-term price driver, not just because of its size but because they tend to be more spot deal-oriented than long-term contracts, so that injects an element of volatility into the short-term pricing," Hyde said. "Butadiene demand growth in China has slowed some, but does remain robust, especially when compared to the rest of the world."
He forecasts a drop in global demand for 2020 of about 7-8 percent, because of the economic impact of the pandemic. Growth is expected in each of the major regions beginning again next year, but the amount of butadiene sales growth projected for 2021-23 in the U.S., Western Europe and Northeast Asia outside of China, won't exceed the total sales the market lost in 2020.
Because China's butadiene expansions will make it self-sufficient for this material as well, there will be lost market shares for a number of nations that export butadiene, including some in Western Europe as well as Saudi Arabia, Brazil, India and possibly Russia.
Styrene demand has rebounded to pre-pandemic levels, Hyde said, particularly because of the strength of packaging applications. The market is heading into a period of drawdown with styrene inventories, and prices will increase some going through 2021 based on cost, not demand factors.
However, it is the massive overbuilding of styrene capacity, mostly in Asia, that will drive down profit margins for styrene producers. "Styrene margins have been strong, but those days are probably over, and over the next few years those margins will be at the low end of the range," he said.
So Hyde looks for butadiene and styrene prices to be relatively weak compared to where they've been the past several years.
"If you're an SBR buyer, or a polybutadiene buyer, that is music to your ears because you should see relatively competitive pricing for synthetic rubber as we move through the next several years," he said.
The drive to improve sustainability in plastics markets is another trend that SR buyers and producers need to watch as well, according to Hyde. That impacts synthetic rubber because if the recycling of certain products rises significantly in the future, that could cause the demand for virgin feedstocks such as ethylene to decline.
If demand goes down, then co-product supply that is so important in the styrene and butadiene space may be less available and potentially limit supplies of the monomers going forward, he said.