VINACHEM

Challenges facing the Europe styrene market are considerable with little prospect for recovery on the immediate horizon, as weak demand and supply tightness increase pressure for players to make structural adjustments.

Near-term supply tightness resulting from domestic supply disruptions will likely persist through August, with imports – seeking to cash in on Europe’s recent price spike – not anticipated to arrive until September.

Domestic units are also likely to maintain reduced run rates or remain offline in the third and fourth quarters because of bearish broader market fundamentals and reduced feedstock flows from crackers.

But with a high energy cost regional disadvantage, macroeconomic headwinds continuing and an ongoing build-up of global styrene production capacity, the European market faces an increasing likelihood of structural adjustments going forward.

After sharp price increases took hold of Europe’s styrene market early in July, expectations are for the coming months to be rocky, with fickle demand, fragile supply and thinly traded volume obscuring market direction.

Recent weeks saw production issues tighten domestic supply dramatically, halting a downtrend and pushing prices to their highest levels in eight months, restoring positive spreads over feedstock benzene, closing the yawning contract-spot spread, and pushing the forward curve into backwardation after months in contango.

Spot margin estimates for styrene production increased triple digits into positive territory this week, according to ICIS Margin Analytics.

With domestic production running at low levels, thin imports in recent months and domestic inventories getting lower, the market was left exposed to a series of supply shocks.

LyondellBasell and Covestro announced in July they would idle the 680,000 tonnes/year unit in Maasvlakte, the Netherlands, through August, pointing to high inflation and poor production economics, and setting no clear date for a restart.

BASF is also understood to be entering a maintenance period at its 550,000 tonnes/year unit in Ludwigshafen, Germany, in August, and there was unconfirmed discussion of another domestic production issue in July affecting a unit in the Netherlands, according to market sources. A force majeure after a pipeline fire at a unit in the US helped to further tighten the market.

But styrene’s recent ascent has done little to restore confidence in the market. As fundamentals remain poor and sentiment subdued, players wonder how long the uptick will last.

“The market is still physically very tight for August, at least,” a Europe-based distributor said. “With demand where it is the supply shock will be less severe and shorter-lived than it could have been, but there is a lot of capacity out of action.”

But the weak demand is also posing a challenge for participants who find it harder to read market conditions when volumes are low.

“It’s really hard to decipher who is running and at what rates,” a Europe-based styrene trader said, adding that newcomers to the market were struggling and some had lost a lot of money.

“With low liquidity, it’s impossible to make anything out of it,” a second trader said.

The uptick in buyer caution has put the market in ‘wait-and-see’ mode and reduced lead times on orders, which has made deliveries harder to manage when companies are running with tight inventories.

There were “a lot of timing and planning issues,” a second distributor said.

On top of that, market forecasts were generally bearish at the end of the first half, and the sudden tightness caught many players by surprise.

“The EPS (expandable polystyrene) forecast keeps coming in bearish but then changing,” the trader said, adding that this had led to a string of prompt orders.

Challenges facing the Europe styrene market are considerable with little prospect for recovery on the immediate horizon, as weak demand and supply tightness increase pressure for players to make structural adjustments.

Near-term supply tightness resulting from domestic supply disruptions will likely persist through August, with imports – seeking to cash in on Europe’s recent price spike – not anticipated to arrive until September.

Domestic units are also likely to maintain reduced run rates or remain offline in the third and fourth quarters because of bearish broader market fundamentals and reduced feedstock flows from crackers.

But with a high energy cost regional disadvantage, macroeconomic headwinds continuing and an ongoing build-up of global styrene production capacity, the European market faces an increasing likelihood of structural adjustments going forward.

Volatility, poor visibility expected through August

After sharp price increases took hold of Europe’s styrene market early in July, expectations are for the coming months to be rocky, with fickle demand, fragile supply and thinly traded volume obscuring market direction.

Recent weeks saw production issues tighten domestic supply dramatically, halting a downtrend and pushing prices to their highest levels in eight months, restoring positive spreads over feedstock benzene, closing the yawning contract-spot spread, and pushing the forward curve into backwardation after months in contango.

Spot margin estimates for styrene production increased triple digits into positive territory this week, according to ICIS Margin Analytics.

With domestic production running at low levels, thin imports in recent months and domestic inventories getting lower, the market was left exposed to a series of supply shocks.

LyondellBasell and Covestro announced in July they would idle the 680,000 tonnes/year unit in Maasvlakte, the Netherlands, through August, pointing to high inflation and poor production economics, and setting no clear date for a restart.

BASF is also understood to be entering a maintenance period at its 550,000 tonnes/year unit in Ludwigshafen, Germany, in August, and there was unconfirmed discussion of another domestic production issue in July affecting a unit in the Netherlands, according to market sources. A force majeure after a pipeline fire at a unit in the US helped to further tighten the market.

But styrene’s recent ascent has done little to restore confidence in the market. As fundamentals remain poor and sentiment subdued, players wonder how long the uptick will last.

“The market is still physically very tight for August, at least,” a Europe-based distributor said. “With demand where it is the supply shock will be less severe and shorter-lived than it could have been, but there is a lot of capacity out of action.”

But the weak demand is also posing a challenge for participants who find it harder to read market conditions when volumes are low.

“It’s really hard to decipher who is running and at what rates,” a Europe-based styrene trader said, adding that newcomers to the market were struggling and some had lost a lot of money.

“With low liquidity, it’s impossible to make anything out of it,” a second trader said.

The uptick in buyer caution has put the market in ‘wait-and-see’ mode and reduced lead times on orders, which has made deliveries harder to manage when companies are running with tight inventories.

There were “a lot of timing and planning issues,” a second distributor said.

On top of that, market forecasts were generally bearish at the end of the first half, and the sudden tightness caught many players by surprise.

“The EPS (expandable polystyrene) forecast keeps coming in bearish but then changing,” the trader said, adding that this had led to a string of prompt orders.

Outlook still gloomy

It's unlikely the current tightness will last, with plenty of idle capacity in Europe and imports from Asia and the US looking to play the current arbitrage, according to ICIS lead styrene analyst Moritz Lank. “Domestic producers will be careful ramping up not to flood the market,” Lank said.

With poor demand and competition from imports in the months ahead, how quickly producers increase output will be key.

Demand for styrene is not anticipated to recover significantly from current low levels in the coming months, with a seasonal slowdown typically taking place over the summer period in Europe.

The current slump in construction-related demand could worsen as higher interest rates affect an increasingly large portion of mortgages, and as the post-pandemic shift away from offices leaves commercial buildings empty.

Even though inflation has cooled off its peak, it is still above the Europe Central’s Bank’s target rate of 2.0%, and in some European countries, mortgage rates have almost doubled.

The HCOB Eurozone Construction PMI fell further, to 44.2 in June of 2023 from 44.6 in May, and no meaningful recovery is expected in the second half of the year.

“I’m hearing crazy numbers, especially in the coatings sector,” a Europe-based styrene producer said, referring to demand reductions of up to 50%. Those reductions were seen as “absolutely unsustainable and very difficult to manage, because you also have an increase in labour and energy costs.”

In general, macroeconomic pressures and high energy costs are expected to maintain constraints on consumption in end-use markets and pressure on producers.

“There is a million reasons why these guys shouldn’t be running,” a third Europe-based styrene trader said, referring to domestic producers.

But even if a unit were permanently closed in Europe, that volume “will be replaced fast, by anyone, anywhere who has surplus,” a third Europe-based distributor said. “There’s a surplus of chemicals globally, so it doesn’t matter what you shut down.”

Where arbitrage economics, vessel availability and inventory space allow, competitively priced imports from the Middle East and North America are likely to maintain pressure on the European market in the longer term.

Indeed, following news of fresh domestic supply disruption in early July there was unconfirmed discussion of imports of up to 30,000 tonnes of styrene from Asia, along with confirmed imports from the US of at least 17,000 tonnes of spot material.

Fighting for survival, Europe eyes closures, hurricanes

Struggling with a structural cost disadvantage along with expectations of poor demand, there is little positivity in the longer-term outlook for the Europe styrene market.

Europe’s relatively high energy costs are expected to remain a challenge for the industry up to 2026 or 2027, when major new sources come onstream globally.

Considering the ongoing styrene production capacity investments in China, and potential for more imported styrene and derivatives seeking buyers in Europe, permanent closures of domestic styrene units may be a possibility in the coming months.

“If a product is burdened by cost in Europe that won’t go away, you have to think twice,” a second producer said. “You can roughly say a European producer is disadvantaged by €100/tonne in terms of energy cost, carbon certificate etc, [and] with the lack of demand in H1 some producers are thinking about going out of the market permanently.”

Global styrene production capacity is expected to grow to around 44 million tonnes in 2023, around 10 million tonnes above 2019 levels, and virtually all that growth is in China, according to the ICIS Supply and Demand Database. This dwarfs the European industry, with a capacity of around 5 million tonnes.

“Even on paper these plants make no sense,” a distributor said referring to rapid styrene capacity expansions globally, changing the supply balance.

“If you’re producing in Europe, you’re not having a good time.”

Margins have been poor for over a year, and the higher structural utility costs in Europe compared with Asia or North America have added to the challenges faced by European styrene producers.

“Margins have imploded across the chain,” another Europe-based styrene producer said, adding that this meant “end users will have to pay for the green transition.”

These sentiments have been echoed by others, reflecting on the premium for recycled products over virgin polymer.

“The whole green agenda has been pushed back because everyone is fighting for survival,” a trader said.

Europe’s producers battled oversupply through much of the first half, albeit at minimum rates, thanks to offtake commitments, integration with other units and take-or-pay agreements, among other factors.

“There’s a lot of variables that prevent people from doing the strategically right thing, so for whatever reason they continue to produce above the demand of the market,” another trader said.

The broad industry assumption that demand will not recover until 2024 suggests we will start seeing announcements of permanent shutdowns later this year, according to Alex Lidback, Vice President of Chemical Analytics at ICIS.

“Every day that goes by, the likelihood of permanent shutdowns increases,” Lidback said, referring to the spell of poor margins affecting styrene producers over the past year.

But those “difficult decisions have been slow to come,” he said.

Unlike in previous downturns, most chemical producers had entered in healthy financial positions and had been hoping demand would strongly rebound in the second half of 2023, Lidback said.

“Balance wise, it might improve, but fundamentals – I don’t see it changing dramatically this year,” another producer said. “There is a wave of people getting fired to come.”

The producer added that all signals pointed to the situation remaining “challenging.”

“It would help if there were a winter storm or hurricane in the US,” the producer said.

And beyond Europe’s current phase of interest rate hikes passes and a possible rationalisation of the styrene industry, perhaps we will see conditions improve, a Europe-based trader said.

“Maybe it’s a cycle where these things need to happen, and we need to see this cycle of rationalisation carry through,” the trader said. “It will be one year, maybe two.”

Styrene is a chemical used to make latex and polystyrene resins, which are, in turn, used to make plastic packaging, disposable cups and insulation.  – ICIS –