SEATTLE—Feedstock supplies and prices can have a great impact on both synthetic rubber producers and down the line to end product makers. So a lot of attention is paid to market conditions to try to plan as much as possible for potential volatility in supply and pricing.
But a panel at the recent International Institute of Synthetic Rubber Producers Annual General Meeting in Seattle indicated that current market conditions may favor buyers, at least for the time being. The future outlook for vital feedstocks such as styrene and butadiene depends on many factors, including whether all of the announced large-scale projects go forward.
For styrene, the global market is almost 36 million metric tons, with an expected average annual growth rate of 4.3 percent through 2022, according to Paco Rangel, vice president of aromatics for Argus Media. But demand is projected to grow only by about 1.9 percent a year.
It's also easy to see the importance of China in terms of demand, as it accounts for about one-third of global styrene consumption, he said. Add in the rest of Asia and India, and the total grows to roughly two-thirds of demand.
"The main topic is whether the market is in risk of oversupply in the next five to seven years," Rangel said. "About 6 million tons of new capacity is being announced in China. I don't think all that is announced will come online, or the margins will be on the verge of collapse."
To put supply needs in perspective, he said if demand grows by 1.9 percent a year, the world needs about 570,000 tons a year of new capacity if everything stays the same. That's about the equivalent of one new world-scale plant per year in the next five years. "This is not as simple as it sounds," Rangel said, "because a lot of the new capacity will face delays. A lot will be replacement capacity, most likely in China, as older, less efficient, non-integrated plants will most likely be shut down as a result of new projects."
He expects the U.S. to continue to keep a cost advantage in terms of styrene production. "This will be significant as new capacity comes along in China and prices come down, the margins will get squeezed in a couple of regions," Rangel said. "Even with capacity being built in the Far East, we continue to think that the U.S. will continue to be a supplier of styrene to the rest of the world."
Doug Lipsey, sales manager for Westlake Styrene L.L.C., agreed with much of Rangel's assessment. With regards to all of the capacity expansions announced, he said the bigger units attached to mega refineries will be built.
"These are game changers," he said. "These guys are serious. This will be a very pronounced difference in the world of styrene markets. I'm not taking away from the others, the ones integrated into the refineries are going to run, and they're going to run hard."
He said before operating rates get too low, there will be adjustments in the world, particularly in China. That's because there is much capacity in China that isn't tied to either downstream or ethylene integration.
"These are the high-cost, inefficient plants in China that I think will be cannibalized first when these new Chinese plants start up," Lipsey said.
Chinese antidumping duties also have impacted the market, according to the Westlake official. His company was investigated by China in 2017, concentrating on 2016 supply. As the U.S. Department of Commerce asked them to cooperate, Westlake spent more than $1 million dealing with the audit, he said.
In the end, of the 9 million tons of styrene demand in China in 2016, Lipsey said Westlake estimated the firm supplied less than 1 percent of the materials. He said Westlake was slapped with initial duties of 13 percent, which are now up to 25 percent.
"So we're not shipping to China," he said. "Nobody from the U.S. really does. The supply and demand of the world didn't change, but the trade flows did."
Bill Hyde, executive director of olefins and elastomers at IHS Market, and Charles Graham, senior vice president, commercial, for butadiene producer TPC Group, had a bit of a different view of where the butadiene market is headed.
Hyde, who worked for TPC from 2000-02, said the difference of opinion at its core comes down to the percent yield that comes from ethane cracking. Looking at butadiene to ethylene production ratio, Hyde said his group assumes that the butadiene produced in this manner is about 2.5 percent of ethylene product, while others put the rate at 3 percent or higher.
For years the difference didn't make much of a difference in the market, as an extra 50,000 tons of butadiene in the U.S. didn't change market dynamics. Hyde said that isn't necessarily the case anymore.
Currently, he said North America is a net importer of about 350,000 tons a year of butadiene. Even with more ethylene projects coming on stream, that number is still somewhat uncertain.
For example, two ethane crackers in China are under construction and he said both have firm supply arrangements with reputable U.S. companies, according to the IHS analyst. But if there are 25 percent tariffs placed on that material brought into the U.S., then all of that supply won't be competitive on pricing.
"Our base assumption is that at some point cooler heads will prevail," Hyde said. "We think China and the U.S. both have such strong incentives to come to a deal that the real holdup is how do you make a deal so both of these leaders can go home and say this is what we want?"
So as the market moves forward, the difference between a 2.5 and 3 percent ratio of butadiene yield switches North America from being a net importer to a balanced supply/demand position in a different time frame. "That 50,000 tons could change the answer by a couple of years," Hyde said.
Graham said TPC sees more ethylene capacity coming on stream in North America and with that a lot of crude C4 and butadiene. "All olefin crackers also have derivative factories being built along with it," he said. "Our belief at TPC is that because of the cost position, these facilities will run, and what you will see over time is the smaller European and Asian naphtha crackers will go to lighter capacity, or the older, higher-cost facilities may shut down."
There is no doubt, Graham said, that there will be butadiene out there and that there's capacity in North America that can handle it. "I think what this means is a more competitive environment for the North American producers."
He added that the current butadiene yield is above 3 percent, though that could come down as new ethane crackers come on stream. "We are having serious discussions with all of the projected second-generation plants because they have to make sure there's a home for their crude C4's and, until they get comfortable, that's part of their decision process."
If TPC is right with their assumptions, Hyde said the North American market will be balanced by 2022, though he still believes the market will behave as if it's a net exporter because there will be less global trade of butadiene by 2022-23.
Graham said he believes North America will become a net exporter sooner rather than later. "A lot of this depends on the operating rates of the olefin units and whether the ones are built out there, which is what our current forecasts are," he said.
Hyde said the bottom line is that from a customer's perspective, the market for butadiene supply is trending in a favorable direction. "It will not be linear," he said. "There will be bumps along the way, and price and supply volatility will always be a significant factor in your market."