There were signs of a possible slowdown in the Northwest European butadiene market as market sources reported softening demand, improved supply and increased resistance to record high price levels Thursday.
The global butadiene market has spiked considerably since early March, where tight supply in the US Gulf Coast and Europe has supported a series of steep price increases.
According to market sources spot trade has recently been done in Europe as high as $4,900/mt FOB NWE, with the majority of producers currently offering limited spot product at $5,000/mt or above.
Many sources are now of the view that current prices are the peak of market, which has climbed by $3,090/mt in spot terms and Eur1,160/mt ($1,680/mt) in the contract market over 2011 to date.
This has mainly been fueled by a shortage of butadiene feedstock crude C4 and subsequently finished butadiene in the US Gulf Coast. Cracker economics in the US support the use of ethane as a feedstock, which in turn yields a lower level of crude C4.
One consumer believed that the market was set to fall, however, citing several negative factors including improved European supply and demand erosion as a result of the price spike.
The consumer said that supply in Europe had improved -- a view supported by the appearance of more producers in the spot market.
"The spot market has become much longer. I'm being offered spot product from all European producers now," the consumer said.
There have also been reports in the market of European consumers being offered a discounted spot price compared to traders looking to buy for export, something that was not seen in the market in March, April and May, when supply in Europe was at its tightest.
One source said that although many sellers have continued to look for $5,000/mt FOB, there had been "some proposals below $4,600/mt."
Demand in Europe is also said to be falling as certain downstream sectors have struggled to absorb the sharp rise in butadiene prices.
One producer acknowledged this situation and said: "There has been some fall in demand, but I think it is still marginal and we haven't seen a fall in contract nominations. Some segments like latex or acrylonitrile-butadiene-styrene have reduced buying."
Buyers added that domestic demand was likely to reduce in some sectors -- styrene-butadiene-rubber and nylons -- going forward, because of problems further downstream, where consumer buying has slowed down.
One consumer said: "As a buyer, we can see that demand will drop. Whether that comes in July, August or September I don't know. But for Q4 we will definitely see a dip in demand."
As spot levels were poised to hit $5,000/mt for incremental European tonnes, sources also believed this would discourage buyers. Something that had previously not been the case according to consumers and traders.
A trader said: "People are becoming more careful now. We've reached a level on spot where it stops making sense to buy incremental tonnes. You're better off just not doing it."
The trader continued: "There is a sentiment now that says prices have to fall. There is no longer the feeling that if you don't buy today, prices will be higher tomorrow. August should be weaker."
One source needing to buy July spot volume said that the current offer levels had led to "a lot of discussion going on internally". The source continued: "Any product we buy now, will go into finished products for sale in September [where downstream demand is expected to be lower.]"
In addition to an apparent slowdown in domestic buying, sources also questioned whether the demand from the US Gulf Coast for imports from Europe would remain.
According to one trader there was "still interest in volume in the US, but price-wise its more difficult to work."
A second trader elaborated on this and said: "At present, we don't see people willing to pay 240 cents/pound in the US, which would justify $5,000/mt.
"It's still very dangerous to export to the US, because at these prices we could see big percentage falls in price. If we buy 1,000 mt at $5,000/mt in Europe and can only sell at $4,600/mt, that's a $400,000/mt loss. There are few traders who can absorb that."
Others believed that following a consistent flow of product over the year, plus improved potential supply from Asia to the region demand in the US was getting satisfied. One source even believed that when the latest round of imports hit the US in July "the US will be full."
The trader felt however that "economics in the US are for continued cracking of ethane, which should mean that the market there stays very tight." He added that this should maintain some "need for product" in the Gulf coast.
On the production side in Europe although the market was seen as less tight than the US, there were still concerns over domestic supply of both butadiene and feedstock crude C4.
Producers added that supply could tighten further over the summer as cracker rates have been reduced because of low demand in the polyethylene sector. The preference for cracking LPG's such as butane over summer would also restrict crude C4 yields sources acknowledged.
