Market and product

The price spread between phenol and acetone prices into China is unlikely to stay at the atypically narrow level even as fundamentals for the two products diverge, market participants said on Tuesday.

The price spread sank below $100/tonne in the week ended 18 November, significantly lower than the roughly $300/tonne in recent years, according to data compiled by ICIS.

On 18 November, phenol prices were assessed by ICIS at an average of $750/tonne CFR (cost & freight) China while the prices of by-product acetone were assessed at an average of $670/tonne CFR China on a zero antidumping duty (ADD) basis, subject to import duty.

In recent years, the spread between CFR China phenol and acetone prices averaged at $291/tonne in 2013, $360/tonne in 2014 and $312/tonne in 2015, ICIS data showed.

The accelerated narrowing of the price spread in recent weeks denotes the underlying weakness in China’s phenol market as well as acetone’s relative strength.

Typically, for every tonne of phenol, 0.62 tonne of by-product acetone is produced.

However, the significant differences between trade flow and downstream markets have contributed to the narrowing of the gap between phenol and acetone prices.

As ICIS Consulting has pointed out, global acetone markets have been less markedly affected by the new capacity in Asia and have been more susceptible to short-term tightness than phenol.

This is because the actual capacity increase for acetone is lower while acetone also has a more diverse range of derivative markets, Rob Peacock, a Consultant at ICIS Analytics and Consulting, wrote in June.

Unlike the rest of the Asia, the biggest downstream market for phenol in China is phenolic resins, which accounts for over half of the country’s phenol demand in 2016. The second biggest outlet is bisphenol A (BPA).

In China, solvents account for 40-50% of acetone consumption.

There is also a greater range of downstream petrochemical uses for acetone, including BPA, methyl methacrylate (MMA), isopropanol (IPA), methyl isobutyl ketone (MIBK) and diacetone alcohol (DAA).

In addition, acetone, with its quick evaporative quality, is a preferred raw material for water reducer concrete admixture especially in winter.

Similar to primary product phenol, the resumption of normal operations at most China-based phenol/acetone plants at the end of the peak turnaround season of August to October had weighed on acetone prices.

However, unlike phenol, the year-on-year drop in the volume of competitively-priced deep-sea imports in 2016, alongside ongoing Americas demand for exports from Asia, had cushioned the CFR China acetone market pullback.

“Phenol and acetone markets are completely different. Acetone is outperforming phenol because there is a lot less deep-sea imports this year,” a trader said.

Chinese acetone imports from the US and Europe should total roughly 40,000 tonnes in 2016, less than half the full-year volume of 102,800 tonnes in 2015, the trader said.

Steady import demand into Asia’s two biggest markets – China and India – is a further contributor to the comparatively healthy acetone fundamentals.

Whereas India’s phenol demand has been pummeled by the government’s surprise demonetisation move, the impact of the currency reform on India’s acetone market has been less detrimental, the trader said.

“However, this abnormally narrow spread between acetone and phenol is unsustainable. Asian phenol/acetone makers will have to cut back on their output or even shut down their plants sooner or later to counter the severe squeeze on their margins,” the trader added.

A similar narrowing in the price spread is also evident in the yuan-denominated domestic phenol and acetone prices in east China, ICIS China assessments show.

“The price spread [between phenol and acetone] has narrowed because the underlying fundamentals are quite different. But I think the greater pressure on Asian phenol/acetone makers’ margins is coming from the recent strength in benzene prices,” a Chinese importer said.

Raw material benzene prices in Asia have been on an upward trajectory since late September and have amassed 13.6% of gains in the seven weeks ended 18 November to close at an average of $700/tonne FOB (free on board) Korea, according to ICIS data.

The same seven-week period saw a 13.8% slump in CFR China phenol prices and a 2.2% decline in CFR China acetone prices.

“If benzene prices remain this robust, we will soon see a drop in Asian phenol/acetone plant run rates,” the Chinese importer added. - ICIS