Latex industry impacted by many trends

Fairlawn, Ohio—Companies involved in the synthetic latex industry are part of a complicated value chain and are exposed to a wide variety of trends, most of which they can't do anything about.

"That means you need to at least have an idea of what's coming, so you can be prepared to react—because you can't influence it," said Bill Hyde, senior director, olefins and elastomers, for IHS Markit.

Hyde presented his message in a wide-ranging presentation at the International Latex Conference, held Aug. 8-9 in Fairlawn, Ohio. He touched on the volatile butadiene pricing of the past year, along with overviews of many of the latex feedstocks.

He discussed how butadiene pricing in Asia has led the global market on a roller coaster ride. Pricing there started rising in September 2016, going from about $1,100 a metric ton before topping out above $4,000 in February. Then the prices plummeted back to the current level of about $900.

"Butadiene markets are connected globally, so there were similar trends in North America and Western Europe, but not the same," Hyde said. "And that's part of the complexity that happened—the regional differentials in my view are almost more important than the absolute price levels."

Those regional spreads got to historically large levels, and profit margins along the supply chain became uneven. "The butadiene producers were making a fortune, but the butadiene derivative producers were getting killed," he said.

The IHS analyst said the western European market was slower to react, causing a domino effect. The region generally is a net exporter of butadiene, which means it needs to have the lowest prices in the world. When the differential got high, that was good for them. But when prices fell back, Western Europe didn't react fast enough and the price gap became too low.

"All of the sudden it became possible for US exports to flow into Europe, which happens, but almost never," Hyde said.

A variety of factors caused the unusual market conditions, including a strong second half of demand from the Chinese auto sector, expiring tax incentives and some operating issues in Europe and Asia. Some of the factors were anticipated, but many weren't, "so that turned the world on its side a little bit," he said.

NR prices also have been relatively weak, and there's enough overlap between NR and synthetic rubber that SR firms haven't been able to raise prices. "When their feedstock cost went up, they essentially had to eat it," Hyde said. "That led to some really bad quarters for rubber producers. Things have sort of gotten better. We're still not back to what we would consider normal, but we're on the way."

Petrochemicals focus on ethylene

In the petrochemicals market, ethylene producers really are the center of the universe, he said. They have large, expensive production units built to produce ethylene, but they also crack a variety of feedstocks across the entire value chain.

Hyde said there is a tremendous amount of ethylene capacity coming on line over the next few years. By 2012, there's at least 12 million tons of new capability in the U.S. that is confirmed, and another 3 million tons that he said is "highly likely."

And China also is bringing on new ethylene capability. "Not to use the term in a negative way, but the friction in the market is really between capacity additions in China and North America right now," he said. "And that will define the next three to four years in the ethylene markets."

Because of this Hyde projects that the ethylene markets will have overcapacity for the next couple of years, then have things tighten up, "but that's just in time for the next wave of capacity to come online."

Propylene demand is growing relatively rapidly, he said, at a pace faster than GDP. Polypropylene is the biggest derivative of propylene, accounting for about 60 percent of demand. The plastic is playing a big role in lightweighting of automobiles.

The gap in supply between conventional sources from steam crackers and various processes of making on-purpose propylene has Hyde expecting a "disconnect between propylene price drivers and ethylene price drivers in a way we haven't seen before."

Butadiene trend

The vast majority of butadiene comes as a co-product of ethylene, though some in Russia and China are making it using dehydrogenation processes. Because some of the new ethylene production will be at the "light end of the feedstock mix," Hyde said butadiene yields from the processes will trend down in the medium term.

"What I think you should be most concerned about isn't average (supply), but it's the risk to exposure of unplanned events," he said.

Styrene is in oversupply and will trend that way over the next few years. He said China is becoming self-sufficient for the feedstock, meaning that producers that had been selling into China are looking for other places to sell, "which increases competition across the world."

Pricing is expected to be relatively stable, Hyde said. One reason for that is because the unconventional oil producers—primarily in the US and Canada—are offsetting to a great degree OPEC's effectiveness at raising prices. "They're going to trend up, but they're not going to trend up aggressively over the next few years," Hyde said.