European polystyrene converters reluctantly accept steep Jan price
By Miguel Cambeiro
January 20 - European polystyrene converters have reluctantly accepted the steep rises demanded by producers for January contracts.
Accepting that they had no other choice, converters have had to agree the increases since they had depleted their stocks over December, in anticipation of a return to the market to replenish inventories at a minor feedstock increase.
At the start of the year, PS converters faced steep January contract demands, tabled by styrenics producers following the Eur189/mt ($270) and Eur172/mt ($245) benzene and styrene January contracts, respectively, much higher than anticipated in the first half of December.
Shocked by the sizable increases, most converters initially blamed volatile benzene at the end of December for these increases and the steep increases would have a damaging impact on derivative demand. (Listen to podcast: Increases in aromatics prices and their effect on the derivatives chain).
"Demand is flat in January, and there are no big orders yet. In January we will see a loss if we are forced to accept such an increase. Our only solution will be to cut production and reduce to a minimum in order to limit the losses. If all converters do the same, the producers will have problems passing the increase through," a converter said at the start of January.
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Sources in the styrenics chain did not feel that the current situation would continue. "I think that this (styrene) price hike is temporary," an acrilonitrile, butadiene, styrene converter said.
"I would expect to see some correction on this. This is a disconnect between crude and derivatives. Styrene monomer contract prices at Eur1,000/mt are not sustainable. The January CP at Eur1,018/mt FD NWE is Eur150/mt above what was expected in December," he continued. (See related chart: Styrene NWE CP (Average Eur/mt), Oct 2, 2009 - Jan 15, 2010).
However, this view rapidly changed as consumers, running low on stocks, had to return to buy. In the second week of January, converters were obliged to accept the steep rises demanded by producers for January contracts.
Converters had to agree the producer increases since they had depleted their stocks over December, in anticipation of a return to the market to restock inventories at a modest feedstock increase.
Most chemicals/plastics companies tend to run down stocks and close down their trading books in order to realize and complete their final year-end profit and loss reports.
This in addition to companies keeping low stocks ever since the economic downturn in the fourth quarter of 2008 triggered a slump in prices.
Since then, and under order from senior management, companies have refrained from keeping ample stocks, sources said.
"So far we have agreed one contract at an increase of Eur175/mt. We will agree the remainder of these contracts at a level of Eur170-179/mt. We have no choice, we need to buy," a PS converter said the week ended Janaury 15.
This was supported by another converter. "There is no chance of getting cheaper volumes since they would not arrive until February. There's no point waiting any longer. We need volumes, and have to take them now," the second converter said.
Polystyrene consumers said that producers have been effective in pursuing the full increases.
"I think that there's no room for maneuver other than accepting the full increases. If they continue like this they will get them," the second converter said.
Producers admitted that the steep increase was problematic for a number of converters but they said that they had no choice and would not incur further margin erosion.
"Some said that they will pay Eur180/mt but we have not accepted their orders. We have declined business from consumers who have not accepted the increases," a second producer said.
This is related to low stock positions, according to the producer.
Converters said that the steep increase demanded by producers would be easier to pass through further down the chain than smaller contract price increases.
"A lot of small increases are difficult to pass through but larger ones are easier because of [for example] crude oil increases," the first converter said.
In addition, the steep price hikes cannot be hidden, unlike smaller price hikes, so derivative plastics consumers would be more willing to accept them, according to the first converter.
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Next page: Converters report settling around 40-50% of total contractual volumes