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Butadiene arbitrage flip pushes Asian C4 to US


By Clement Choo, Miguel Cambeiro, Jeremy Rakes


September 19, 2013 - Weak global tire demand is largely suppressing producer attempts to widen butadiene margins, despite strong feedstock costs and a reduction in butadiene supply, sources from the synthetic rubber market said this week.


There has been a recovery in the global butadiene market recently, led by Asia.


The FOB Korea benchmark for Asian butadiene stood at $1,384/mt Monday, its highest since June 14, when it was assessed by Platts at $1,360/mt.


Analysis continues below...


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Tracking the higher spot prices, China Petroleum and Chemical Corp., or Sinopec, Tuesday raised its ex-works butadiene prices in the south by 3% to Yuan 9,800/mt, or $1,335/mt on an import parity basis. In addition, the state-run company raised prices in eastern and northern China by Yuan 200/mt, or 2%, to Yuan 9,500/mt, compared with Yuan 9,300/mt on September 9, when it increased prices by Yuan 300/mt.


Although Asia-based market participants said there has been resistance from the important tire sector, there has been buying support from operators of acrylonitrile-butadiene-styrene plants.


Another reason for the higher prices is butadiene operators seeking breakeven margins for the synthetic rubber feedstock.


On Monday, naphtha prices stood at $956.63/mt CFR Japan, which put a price spread of $427.37/mt between the former and the butadiene benchmark.


Assuming $500/mt for conversion costs, butadiene spot prices were $72.63/mt in the red.


Traders and producers predicted Tuesday that spot prices are set to rise, with October cargoes mostly sold out, adding that discussions for November parcels could begin as early as next week.


EUROPEAN TRADERS NOT KEEN TO CLOSE ARB TO ASIA


In Europe, spot prices rose $12.50/mt on Monday to be assessed by Platts at $960/mt FOB Rotterdam, prompted by the rise in Asia and strong feedstocks.


The price represents a 60% surge since July, when it crashed to a four-year low of $597.50/mt.


But traders remained wary of exporting product due to the particular price volatility risks in butadiene, heightened by the eight-week shipping period to Asia.


With CFR China prices at $1,390/mt, freight to China mainport at around $350-400/mt, sources said that parcels could be exported at anywhere between $990-1,030/mt FOB Rotterdam.


At the higher prices seen recently, butadiene is continuing to sell well below the cost of production given that prices for feedstock naphtha rose to $970/mt CIF NWE in September. Naphtha cargoes were assessed by Platts at $934.50/mt on Monday.


Even a September butadiene contract price of Eur775/mt FD NWE, or equivalent to $1,031/mt, means that butadiene is being produced substantially below breakeven costs, sources said.


In Europe, market participants said producers are still waiting for a recovery in the key automotive sector. Butadiene rubber is a key component of styrene-butadiene rubber, used in the manufacture of tires and other automotive components.


After a 5% year-on-year increase in EU car registrations in July, new passenger car registrations in the bloc fell by 5% in August, European automobile manufacturers' association ACEA said Tuesday.


But with the butadiene oversupply problems seen through much of the second and third quarters now over, producers are looking to to raise prices and expand margins squeezed by the rise in energy costs.


"If you look at butadiene in the US at $944/mt and in Europe at $1,000/mt (Eur775/mt), we are still below Asia," a trader said last week.


This was backed by a tiremaker who said the price has to "be below $900/mt FOB, [but] I don't think that anyone is going to sell below $900/mt. This is different to a couple of months when it dropped [below] $700/mt. Naphtha is so much more expensive than two or three months ago."


"Looking at co-crack and hydrogenation value, and with the CP at Eur775/mt [the butadiene price] still not high enough because naphtha is above $900/mt. There's a disconnect with naphtha, but buyers can't live with that higher number," the tire-maker said.


The same source confirmed that rubber demand remains subdued.


Michelin cut capacity in June, and a source at the company said it is in no hurry to increase it again.


"As soon as business ramps up then the company will [increase production], but we just don't see it happening in Q4," the Michelin source said.


"I think that confidence is at a low stage, it doesn't come overnight. When you are coming back from a low point in the market, confidence is like that and people have to see some track record week-over-week," a Europe-based consumer said Tuesday.


US LAGS BEHIND ASIA, EUROPE


In the US, market sources continued to speak of prices lagging behind the increases seen in the European and Asian markets because of weak demand.


Platts assessed the weekly US butadiene price 1 cent higher on Friday at 48 cents/lb ($1,058/mt) CIF US Gulf Coast, but sources have been talking the market between 45-50 cents/lb CIF USG for most of the last month. However, sources said the 45 cents was more of level for buyers who were "bottom-feeding".


Downstream demand in the US tire and styrene-butadiene rubber markets, which make up over 50% of butadiene demand, continued to be heard sluggish, while demand in the downstream nylon and acrylonitrile-butadiene-styrene industries has been steady.


Supply has been heard available but tightening in the market as fewer imports have been heard.


With nominations for the October US butadiene contract price due within the next week, expectations are for a possible slight increase but most US sources don't predict an increase into the 50s cents/lb after the September contract settled at a rollover of 40-47 cents/lb.


Chart: Butadiene FOB Korea vs CIF USG





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