The Northwest European styrene monomer forward market structure is likely to flip into backwardation by March given strengthening fundamentals, industry observers said Monday.
The view is based upon a confluence of bullish indications -- stronger downstream demand into March/April, balanced-to-tight regional supplies and a lack of an open arbitrage for exports to Asia and for imports from the US.
NWE styrene spot values are currently the highest in the world. Prices basis FOB Rotterdam have rallied $111/mt or 8% from the beginning of February to close at $1,516/mt on Friday. In comparison across the same timeframe, styrene monomer prices in Asia rose $18/mt to $1,440.50/mt FOB Korea and US styrene prices increased 2.25 cents/gallon to 67.4 cts/gal ($1,485/mt) FOB US Gulf.
From December, the January values were trading at a discount of $20-25/mt to February, and February values a discount of $20-25/mt to March's in January, but in February, March was trading at a much narrower discount to April of around $0-5/mt.
As of Monday morning, offers for April-loading parcels were placed $5/mt higher than March at $1,530/mt FOB ARA, while bids for both laycans were at the same level of $1,500/mt FOB ARA.
"There is a good chance we will be in backwardation by March," said a trader.
Recent gains in European styrene prices were attributed to tighter supplies, rising demand amid low inventory levels and upward pressures from by a sustained period of high costs and negative production margins.
TIGHTER SUPPLIES
Regional supply in the Northwest European market has been tightening since the beginning of the year, given a prolonged period of poor margins for producers, market sources said.
The styrene/benzene spread hit an 11-month low on January 12 of $124-126/mt underneath the required breakeven spread of $250/mt for ethyl-benzene/styrene monomer producers.
The last time the spread was seen so depressed was on February 16, 2011, when it was assessed at $121/mt, according to Platts data.
As a result, EBSM operating rates have been much reduced since December as it made more economic sense to buy styrene from the spot market as opposed to benzene.
Sources said that Total's 600,000 mt/year SM plant at Gonfreville had been running at low rates since last year, especially given ongoing issues at its cracker at the same time, which would have curtailed ethylene feedstock volumes.
Some industry observers said that shortages could have been balanced out by higher runs at propylene oxide/styrene monomer units in Europe, given the cold snap in February that would drive demand for PO in anti-freeze applications, and reduced demand for expandable polystyrene in the construction industry. But extreme cold weather conditions proved to be shortlived, with temperatures starting to climb by the second week of February.
In March, Germany's BASF will shut its 550,000 mt/year SM plant at Ludwigshafen for routine statutory checks as required by the German authorities and maintenance.
The styrene/benzene spread has therefore since recovered to $256/mt on Friday, with tighter supplies priced into the market. A wide disparity in contract prices versus spot values of $253/mt as of Friday also continued to feed spot demand from end-users and trade liquidity had been especially pronounced in February.
STRONG PROJECTED DEMAND
Going forward, downstream demand from polystyrene, acrylonitrile-butadiene-styrene and synthetic rubber applications is expected to pick up into March and April as the construction, automobile and latex industries prepare for higher consumption volumes in the spring.
"Well I think March is traditionally a busy month for demand and you have a number of production issues--you have product going from the US to South America as they have issues so not coming to Europe so I think it could be firm-ish," said a trader.
Downstream inventory levels are reported to be anemic as end-users held off purchases when SM, PS and ABS prices started to rally in January.
"Prices are going up, it is a take it or leave it price and demand is picking up," said a source in the PS market. "But there is still resistance to price hikes in the market."
Other industry observers however, contend that Europe was looking balanced currently.
"Until three weeks ago, Europe was rather an exporter of styrene...now we do not see any arbitrage windows open in either direction," said a second trader. "Europe used to be a net exporter but it is slowly losing this position as a result of capacity rationalization and increasing production in overseas market."
