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Butadiene capacity increases, despite expectations of weak demand

London — Strong global butadiene supply looks set to continue in the first half of 2020, as new capacity comes online in Asia, despite expectations that downstream demand will remain weak.

Commodities 2020 | S&P Global Platts

Although H1 2020 will see more butadiene turnarounds in Asia than the same period of 2019, particularly in Japan, any shortfall looks likely be offset by the expected start-up of new butadiene units.

In China, new butadiene plants include a 140,000 mt/year unit by Hengli Petrochemical and a 200,000 mt/year unit by Zhejiang Petrochemical.

In Malaysia, Pengerang Refining and Petrochemical (PRefChem) brought online its new 180,000 mt/year butadiene unit in October-November. The company looks set to export all the butadiene produced as it has no downstream units that use butadiene.

However, Asia looks set to continue to receive deepsea cargoes from abroad, despite China continuing to increase its domestic capacity.

In 2019, the CFR China butadiene price benchmark averaged at $1,119/mt to the end of October, according to S&P Global Platts data. That was a significant decrease from 2018 when the CFR China butadiene price averaged $1,430.56/mt.

As a result of falling butadiene prices in 2019, the spread to feedstock naphtha fell to an average of $601/mt for the first 10 months of 2019 compared with $814.46/mt in 2018, according to Platts data. As steam cracker production yields of butadiene are low compared to ethylene and propylene, poor or negative butadiene margins will not typically affect operations.

But the market will continue to monitor steam cracker operating rates in Asia closely, with falling ethylene margins potentially leading to run cuts in 2020. In 2019, ethylene margins fell into a negative territory, which prompted talk of possible cuts, although healthy margins for propylene kept steam cracker operations running fully. Operating rate cuts don't look all that likely in H1 2020 given there are a number of steam cracker turnarounds during the period.

CRACKERS AND FEEDSTOCKS TO DICTATE EUROPE'S DIRECTION

In Europe, views are mixed on the 2020 outlook for butadiene, with direction dependent on feedstock.

"We feel the market is divided into one of two camps: one, very long with abundant material throughout the year; two, reduced run rates/lighter cracker runs will result in a tightening of the market," one consumer told Platts.

Sources said that lower cracker run rates were dependent on US polyethylene imports, with any increase resulting in less demand for European ethylene. This would lead to a need for rebalancing ethylene by cutting cracker run rates, subsequently resulting in lower butadiene volumes.

European consumers also look set to reduce contractual volumes in 2020, amid concerns from some that they were over-contracted in 2019. Well over 90% of butadiene transactions in Europe are typically carried out via contract. Sellers had been heard pushing for longer-term deals to make up for potentially reduced contract volumes.

Concerns were heard from certain quarters that butadiene storage capacity in Europe may be in short supply if length in the market develops.

WEAK DEMAND CURTAILS US PRICING

Following an extended period of static spot pricing, US butadiene market participants anticipate more of the same for H1 2020, with longstanding fundamentals of ample supply and muted demand remaining unchanged.

US spot butadiene entered November at 37.50 cents/lb, stable from late July and trending flat to lower through year-end 2019.

Over the same period contract prices declined, first settling down 3 cents at 43 cents/lb for July before a 3 cent decline to 40 cents/lb for August followed by another 2 cent drop to 38 cents/lb for November, the lowest level for the US butadiene contract since August 2016.

With most customers having their inventory needs fulfilled on a contract basis throughout the year, both spot volumes and demand were virtually nonexistent.

"Demand has been lackluster for some time now, with many buyers taking contract minimums or less," one source said. "C4 availability should remain mostly stable despite the fact that propane and butane are no longer as advantaged over ethane as we saw the last quarter or so."

In the second half of 2019 butadiene was described as long by market sources, with bearish market conditions set to linger into the new year.

According to market sources, the expectation is that these market conditions will hold. With a depressed automotive industry, there is little downstream demand for butadiene in the form of derivative synthetic rubber (SBR).

However, as one source put it, "There always seems a very fine line between a long and a short market, so it does not take much for things to change."

Commodities 2020 | S&P Global Platts

-- Callum Colford, callum.colford@spglobal.com

-- MK Bower, moisekapenda.bower@spglobal.com

-- Fumiko Dobashi, fumiko.dobashi@spglobal.com

-- Edited by Daniel Lalor, daniel.lalor@spglobal.com