FEATURE: Construction, feedstock supply key drivers for global polystyrene recovery in H2

London — Headed into the latter half of 2020, the Asian polystyrene market is expected to rebalance on the closure and commissioning of supplies, and PS will continue to mirror the price movement in feedstock styrene.

Meanwhile, the resumption of demand remains the key question in Europe, with the construction slowdown heavily hitting the expanded polystyrene market. Polystyrene prices have been exposed to extreme volatility in upstream markets in the first half of 2020, and this is likely to set the tone for the second half of the year.

US polystyrene demand is unlikely to see an improvement, though prices are set to gain following a slow rebound in upstream benzene and styrene markets.

ASIAN PS SUPPLIES TO REBALANCE

On the supply front, two major polystyrene producers in Asia will exit the market due to a bearish long-term outlook. Denka will terminate its 200,000 mt/year general purpose polystyrene line in Singapore in late 2020, and Chi Mei Corporate also ceased to produce general purpose polystyrene at its Tainan plant in May. However, such supply losses will be compensated by several new supplies to be brought online in China over 2020-2021.

PS production margins have improved since late 2019 and are expected to remain healthy, as a supply glut in styrene would pressure feedstock prices while demand seems to be recovering. However, positive spreads have led to higher run rates in China, which may persist to the second half of the year. It will also trigger a collapse in prices if supply outstrips demand amid the absence of end-users.

Demand for polystyrene should register a steady recovery, although this is largely dependent on the coronavirus situation. Market sentiment may remain weak given the great uncertainties, but sources expect a demand revival in China, a main PS consumer, to lift the market as many PS producers in Asia are China-centric.

Meanwhile, the market is closely monitoring the conditions in Europe and the US as they are the main consumers of PS end products, hoping the reopening of some economies will boost demand from the bottom up.

"Overall, it's all about when end-users would come back, likely in July or August," said a producer.

CONSTRUCTION DEMAND KEY FOR EUROPE

In Europe, construction demand will remain in focus for much of the second half of the year.

Expanded polystyrene is a major insulation material for many countries in Europe, and is in particular use within Germany and France for homes. Construction activity across the continent has shrunk, with many countries reporting expected economic contraction in the sector due to COVID-19.

No clear signposting has been discussed by European governments for an end to the lockdowns, with social distancing measures expected to remain in place until the third quarter at the earliest. This will continue to impact workforces, as even though essential construction works have continued, proximity restrictions will continue to cut activity drastically.

Steady demand will continue to be seen from food packaging and medical applications drawing on polystyrene grades, and producers will continue to push to maintain or widen margins on these products due to demand destruction for other styrenics markets.

Pricing volatility is likely to remain a key concern in Europe during the second half of the year, as changing restrictions on lockdown measures are likely to differ between countries.

Both styrene and benzene markets have high stock levels in Europe, and without a significant improvement in demand from the downstream, both markets will look to export for support. Further quick swings in pricing may result from length clearing, but without a sympathetic increase in downstream demand from domestic Europe, this will place pressure on polystyrene producers.

WEAK US H2 DEMAND

During the second half of the year, both benzene and styrene are poised to rebound slowly and this should provide a boost to US polystyrene pricing. US polystyrene prices saw significant declines during the first half of the year, with prices pressured by sharp decline in the US benzene contract. The US benzene contract fell 161 cents/gal between March and May, dragging polystyrene prices lower.

Sources noted that US styrene producers were running at reduced rates, and expectations were that run rates were close to 70% industry-wide to end the year. This was expected to result in an uptick in pricing and ultimately could keep margins soft.

Demand growth, which was poor prior to COVID-19, is likely to be muted for the remainder of the year, with strength seen in food packaging and medical applications. However, demand from larger segments, such as appliances, automotive and construction, are not expected to show significant improvement in 2020 as high unemployment rates and uncertainty surrounding economic growth curtail buying interest for durable goods. This will negatively impact initial expectations that put annualized polystyrene growth at between 1.8%-2%, said sources.