Styrene outlook for US, Europe in H2 hinges on China

Demand recovers in China as COVID-19 restrictions ease

But demand in Europe, US expected to remain weak in H2

Petrotahlil — China's increasing demand for styrene as COVID-19 restrictions ease at a time when fundamentals remain weak in Europe and the US is likely to continue driving cargoes east in the second half of the year, but challenges loom as a slate of new domestic capacity is due to come online in China in H2.

Demand in Europe and the US is expected to remain weak in H2 as downturns in the automobile and construction sectors have been only partially offset by enhanced demand from single-use plastics, and styrene producers in both markets are now actively looking to China for buyers.

However, while the revival in demand from Chinese importers supplying domestic downstream industries is likely to boost liquidity amid an open arbitrage between CFR China and domestic cargoes, it is clear the Asian styrene market is already grappling with high inventory and ample supply.

In addition, new Chinese integrated producers that started operating in the first quarter should stabilize production by H2 and even run at full capacity, adding further length to the styrene market.

Despite the delay in the startup of CNOOC-Shell's 700,000 mt/year styrene plant in Huizhou to the first half of 2021 from the fourth quarter of 2020, oversupply remains a key concern in Asia, with Tangshan Xuyang Chemical's 500,000 mt/year unit, Baolai Chemical's 350,000 mt/year unit and Anhui Jiaxi's 350,000 mt/year unit all starting up in China in H2.

The heavy Asian plant maintenance season in early 2020 has also largely ended, which will add additional length. Arbitrage windows from Europe and the US to Asia re-opened in the second quarter due to the collapse of FOB USG and FOB ARA prices, even after the concurrent rise in freight rates was factored in.

"As long as CFR China prices are lower than import parity prices, China's styrene intake won't decrease a lot, even as domestic supplies are increasing," a trader said.

The open arbitrage is set to fuel a flurry of deepsea cargo arrivals in east China in June and July and result in a further inventory buildup in shore tanks. East China inventory levels hit a record high of 324,000 mt in the second week of March and remained above 270,000 mt in May as the global COVID-19 pandemic slashed demand. Market participants expect inventory levels to remain high for some time, keeping CFR China prices under sustained pressure.

US MARGINS WIDEN

In the US, the gradual easing of COVID-19 lockdown restrictions should support domestic styrene demand and lead to a recovery in pricing in H2, market sources said. US styrene monomer prices plunged below even the weakest expectations of many market participants in Q1 to record multiple new lows before bottoming at $375/mt FOB USG on March 23.

Styrene production at US plants was estimated at around 75% of nameplate capacity in early May and was expected to increase in line with the recovery in global demand.

Volatile benzene and styrene prices created wide swings in US styrene production margins in Q2. Weak margins that hovered in the low $60s/mt in December turned negative in mid-February for plants utilizing spot benzene, according to S&P Global Platts data. By April however, Asian demand had lifted spot styrene prices and divorced them somewhat from benzene values, widening the margin to $195/mt. The spread stood at $201/mt on May 22, Platts data showed.

US demand for styrene derivatives is also expected to pick up in H2, market participants said. While polystyrene demand has risen in H1 on the increased use of styrofoam take-away food containers, demand for expanded polystyrene fell as construction projects slowed, and for acrylonitrile-butadiene-styrene tumbled as automakers halted assembly lines, due to COVID-19 lockdowns.

If the domestic car manufacturing and construction sectors were to recover in H2, styrene demand should follow, market participants said. However, the 1.2 million mt Chinese styrene production capacity that is expected to come online in 2020 may still have the knock-on effect of causing a styrene supply glut in the US, sources said.

PRESSURE IN EUROPE

The primary driver of European styrene prices in H2 will be the rate at which COVID-19 lockdown measures are eased, after prices hit historic lows in March at the peak of the demand destruction.

Lower prices propelled a return to positive margins for styrene over feedstock benzene to just below the $250/mt mark, which the market considers a healthy spread.

However the slowdown of the automotive and construction sectors has had an immense impact on demand, with styrene butadiene rubber used in tire manufacturing and expanded polystyrene for home insulation, especially Germany and France.

Although several European governments are tentatively easing social distancing measures as summer approaches, some measures are expected to continue into Q3 and even Q4, maintaining pressure on demand. The market will continue to operate on a hand-to-mouth basis until the coronavirus pandemic passes, a European trader said.

Styrene consumers shifted to more spot buying and reduced reliance on contractual volumes in 2019, reducing demand and leaving the European market in an overly long position, and struggling to find outlets for its surplus, even before COVID-19 emerged.

Without an arbitrage to Asia, European supply promises to remain long throughout 2020, market sources said.