European June styrene contract price has added confusion to the equation

It’s tough making money in the polystyrene (PS) business. Global markets are oversupplied by some 2m tonne and prices are governed by the erratic behaviour of upstream commodity prices for benzene and styrene. For every $100/tonne increase in the price of benzene, polystyrene prices move up by around $80/tonne. But now, the possibility of a dual European June styrene contract price has added confusion to the equation, with styrene players seemingly becoming more and more nervous as a result of market volatility. ‘The difficulty with polystyrene today is trying to predict the price,’ says one producer. ‘Since the last quarter of last year there’s no hiding the fact that the price has been much more volatile.’

May and June have seen combined decreases of around ?300/tonne on PS contracts, but sellers say that to talk of a crash is an exaggeration. The decrease seems dramatic, but it must be looked at in the context of the falling styrene market – and ?750-782/tonne is still a high price for styrene, one that was not seen in 2002 or 2003. The market has been here before and as prices go down, the question in the back of producers’ and converters’ minds is when will they go up again? While PS prices have hit all-time highs, record-high margins have failed to emerge. Margins suffered in February and March in particular, when feedstock prices went up but producers were unable to recover the costs in full. Then came the drop in demand in April and May. One seller says there has been a 10% decrease in accumulated market growth for the first five months of 2005 compared with 2004, with this drop attributable to plummeting April and May volumes. ‘There was a slight margin increase in May,’ says one producer, ‘But profitability is poor as there are no volumes behind it.’

Integrated producers agree it helps to be involved higher up the refining chain. There has been no profitability in the European PS industry for five years say sellers. One producer points out, ‘By the time you get down to the polystyrene market, there is practically no margin left – people are losing money right across the industry.’ Producers have been trying at least to prevent high stock levels from placing further pressure on prices. BASF reports it is now coming up from an average operating rate of 30% in May when it stopped production at its Tarragona plant in Spain and cut capacity by half at Ludwigshafen, Germany, and Antwerp, Belgium. It is also keeping inventories down to ten days.

Innovene brought forward its shutdown timetable and other producers have cut operating rates in an attempt to match demand. Average operating rates for the polystyrene industry are pegged at 50-70% in Europe. ‘The one thing the industry has done well is balancing stocks with demand,’ says one seller. Globally, operating rates for PS are much lower than for polyethylene, polypropylene and PVC, which at least helps to prevent substitution of other thermoplastics for PS. CMAI forecasts a global annual growth rate of 3% over the next five years, with global operating rates around 82%. By 2010, another 1.5m tonne/year of capacity will be added to the market, but over 80% of this will be in China.

European sellers agree that rationalisation needs to take place in Europe and there are ‘rumours’ of a possible announcement in the next couple of months. Many feel that the issue of pricing volatility also needs to be addressed. BASF has introduced a monthly reference price and many see the ‘advantages and disadvantages’ of futures pricing for PS on the London Metal Exchange (LME). Meanwhile Nova (which showed a net loss of $21m in the first quarter of 2005 for its styrenics business) and BP are looking to become the most cost-effective producers in Europe through their upcoming joint venture, Nova Innovene. In the short term, Asian styrene prices seem to be recovering, crude oil remains above $50/bbl and although June demand may be disappointing, PS converters will be forced to restock. As a result, there is some optimism from producers that PS prices have bottomed out – for the time being at least.