INSIGHT: Europe phenol industry braces for impact of auto closures

LONDON (ICIS)–While European phenol contract prices have plummeted to an 11-year low in April and spot prices are now at their lowest since 2002, consumption has largely beaten expectations amid the coronavirus downturn.

However, many in the industry see further downside in the coming weeks.

– Q2 adder fees roll over

– Impact of automotive plant outages awaited

– Export business eyed

“No one is optimistic,” one Europe-based phenol producer said.

“All of us are in a big risk.”

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FALSE HOPE?
After governments across Europe put in place measures to contain the spread of the coronavirus, logistics, business operations, markets and industrial output have taken a hit, and the outlook for the industry has become increasingly blurred.

Consumption is depressed, but has beaten expectations of a coronavirus-linked downturn, although conditions are expected to turn in the coming weeks after automotive plant closures have halted production of nearly 1.5m vehicles as of Thursday, trade group ACEA said.

Another phenol producer described the current situation as feeling “like the calm before the storm.”

The automotive closures have hammered demand for phenol used in caprolactam (capro), but are also expected to hit bisphenol-A (BPA), depending on how long the automotive shutdowns and factory closures last.

Larger phenol buyers that produce BPA and epoxy resins, for example, “are saying they still have a strong [demand] pull … and aren’t seeing a cliff they are about to drop off,” the producer said.

Some participants are hopeful that restarts could happen this month.

A Europe-based phenol trader, however, noted that demand for epoxy resins was “not really sustainably good” as demand into the construction sector is not expected to remain at current levels.

Demand for BPA has also been recently supported by lower import volumes.

Downstream demand for polycarbonate (PC) is also being boosted by heightened consumption of transparent sheets, which are being used to protect cashiers against the coronavirus, but that is also not expected to replace automotive demand.

Demand for phenol used in phenolic resins has largely remained steady as a result of stockpiling, according to one Europe-based phenol buyer, who estimated that the industry was still at least eight weeks away from peak disruption levels.

“This stocking exercise that is bringing up inventories will end, and things will get much worse,” the buyer said.

“Everyone is living in the false hope that this will ease within two weeks, but that’s not going to happen.”

Other sources were more blunt, although the timing of the impact remains up in the air.

A Europe-based phenol buyer said he expected the automotive plant closures to cause the market to “crash”, adding that the coming weeks “will be a disaster.”

BIG RISK
Phenol availability was reduced in Europe in the first quarter as a result of a six-week outage of the region’s biggest plant, INEOS’ in Antwerp, Belgium, which resulted in an ongoing force majeure only lifted this week.

Later in the quarter, Spanish producer Cepsa also declared force majeure after a technical issue forced a temporary closure of one line at its Huelva plant.

However, depressed demand meant supply remained ample in most cases.

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“People are not worried about this force majeure from Cepsa, and that’s always a sign,” a Europe-based phenol buyer said, referring to the currently depressed demand levels.

Coronavirus-related issues have also led producers Borealis and INEOS to postpone planned turnarounds, which should further add to supply pressure.

Producers have increased monitoring of customers to ensure they will continue to take volumes, and in some cases have pushed them to take additional volumes up front.

“We have a lot of work with many changes and things to adjust and reschedule,” a Europe-based producer said.

While the current low price levels should make restocking attractive, there are physical limits on how much volume the market can absorb.

“At these price levels people will probably be inclined to refill until they are full,” one large phenol buyer said, adding that its company could no longer “find a place to put product”.

“The situation downstream is really critical,” another producer said, adding that the company was “a little bit scared of the credit limits” of its customers, and was monitoring them “very closely” given uncertainties around how conditions will develop.

Adding to supply difficulties, logistics problems have also recently spiked for the industry as lengthy queues at border checkpoints added new costs and delays to truck deliveries.

There have also been difficulties finding drivers to make journeys, especially into higher-risk regions like Italy.

“We don’t know if plants will be running in two weeks from now,” a Europe-based phenol producer said, referring to plans that were changing daily and the entire industry in a “big risk.”

HUGE DROP
Phenol contract prices for April were assessed dropping to levels not seen since May 2009, with rollovers agreed on contract adder fees for the second quarter.

The historic price movement followed a 70% decline in benzene contract prices for April to a record low that has forced the industry to re-evaluate inventories.

In addition, since only around 0.9 kilogram of benzene is required to produce 1.0 kilogram of phenol, with the remaining 0.1 kilogram coming from oxygen in the air and costing the producer nothing, fluctuations in feedstock benzene prices have a disproportionate impact on phenol profitability.

When benzene prices are high, the advantage widens, and conversely when benzene prices are lower, the margin decreases.

These are expected to hit producer balance sheets in April.

“We’ve seen a huge drop in benzene [and that] will have a huge impact on our margin,” a Europe-based phenol producer said.

Adder fee discussions were completed relatively quickly as participants avoided lengthy price discussions while coronavirus-linked disruptions and upstream volatility have blurred the outlook for the following months.

Earlier in the adder fee discussions, there were some attempts to both raise and lower adders, but these efforts disappeared toward the end of March.

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The phenol domestic spot range fell to levels not seen since March 2002, while export prices plummeted to 2009 levels. At least two export deals were heard settled amid increased arbitrage opportunities in Asia.

The domestic spot range was adjusted on a notional basis to reflect the drop in benzene as spot deals typically are based on the benzene monthly contract price, plus an adder fee.

No domestic spot business was reported this week.

Front page picture: Empty parking spaces in front of the main factory of German automotive major Volkswagen in Wolfsburg at the end of March
Source: Jens Schlueter/EPA-EFE/Shutterstock

Insight by Fergus Jensen