London — The global butadiene market is expected to remain bearish in much of the second half of 2020, following falling prices in the first half of the year as demand from the automotive industry collapsed.
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Asian supply likely to be offset by TAR delays
The Asian butadiene market may remain steady in the second half of 2020, with bearish demand for downstream synthetic rubber potentially offset by delayed butadiene plant turnarounds in China.
Synthetic rubber demand is likely to remain subdued in the second half as weak automotive sales look set to continue. Asia's largest automotive manufacturer, Toyota Motor Corp., has forecast automobile sales for the 2020 fiscal year at 7 million units, down 22% from 2019.
Several butadiene plant turnarounds in China have been delayed to the second half of the year, largely due to labor shortages and social distancing measures amid the coronavirus pandemic.
For 2020, eight steam crackers with a combined butadiene capacity of 805,000 mt/year are scheduled to be shut for turnarounds in China. Aside from two steam crackers -- Yangzi and Sinopec Sabic -- all other planned turnarounds have been delayed until after June. The six crackers expected to shut for maintenance in H2 2020 have a combined butadiene capacity of 545,000 mt/year.
Market sources said falling freight rates, amid weak bunker fuel, will continue to attract arbitrage cargoes from Europe. According to the latest statistics from Chinese customs, China imported around 49,000 mt of butadiene from Europe for January to March, accounting for 47% of its total imports of 103,000 mt.
Market participants are also closely eying the butadiene-naphtha spread, which has been narrowing in the first half of the year. According to S&P Global Platts data, the spread sank to a seven-year low of $96/mt on May 6. Market sources said Asian butadiene could fall below naphtha prices in the second half of the year, considering continued expected weakness.
European market looks to Asian exports
In Europe, industry participants remain largely bearish regarding H2 2020 and are predicting little short-term improvement.
The downstream SBR sector looks set to have another downbeat year amid a bleak picture for the tire industry, with Europe looking to exports to fill the gap in domestic butadiene demand.
The first half of the year saw butadiene export prices hit a historic low of $50/mt FOB Rotterdam as the automotive sector shut down across Europe, leading some SBR producers to follow suit. The European industry-settled contract price for May was Eur325/mt, the lowest since Platts began reporting the settlement in early 2007.
Run rates at auto makers are expected to remain low for most of the rest of the year," a buyer said. "Butadiene demand will remain pretty depressed," the byer said. "All we have seen is exports and I think we will see even more than normal."
European producers and traders look set to continue targeting the Asian markets and the recent fall in freight costs looks set to allow further price flexibility for European players.
Domestically, much will depend on supply levels as high run rates due to profitable ethylene and propylene margins look likely to continue to add butadiene to an already long market. Cracker operators had been heard seeking alternative options for crude C4 in a bid to limit oversupply.
"The crisis hit suddenly, so it's taken people a while to react, but people are now looking at alternatives for the C4," a European producer said. "Margins in the cracker are good but this is the not the case for every product like C4."
"We are still facing a few tough months," the producer added. "What I expect is we'll hopefully see a slow restart -- it will be long and very gradual."
Historically low US price environment set to continue
Following historic low spot and domestic pricing, US butadiene market participants predict more of the same in H2 2020, and say the situation will worsen further before it improves in the fourth quarter.
Producers long on butadiene, combined with demand destruction caused by the coronavirus pandemic, have sent spot and contract butadiene prices on a downward spiral, to hit 11-year and 18-year lows, respectively.
With a depressed automotive industry, there is set to be little downstream demand for butadiene in the form of downstream SBR.
Goodyear Tire & Rubber Company said it took immediate steps to cut costs and stop incoming raw materials such as butadiene. "We quickly shut down production in the US and Europe, and work with suppliers to stop the flow of raw materials and other supplies to reduce expenses and to avoid tying up capital in inventory unnecessarily," Chief Financial Officer Darren Wells said.
Given multi-year low prices, some companies in the automotive sector are looking to benefit in the second half of the year as they look to emerge from the slowdown.
"As we ramp back up we'll start to buy materials again, but we won't buy a significant amount until the third quarter so we would start to get some benefit in Q4," Wells said. "The active question is going to be 'what's the price of these materials in Q3?' because that's when we're actually going to be buying them."
However, refinery rate cuts could depress supply and prop up butadiene prices. Butadiene "can get tight and push prices up, especially if there are no imports," one source said.