Chemical Conversations: Butadiene Outlook

Lauren Williamson, VP, Product, talks to Angie Joe, VP, Crude C4 and Derivatives, about the Argus Butadiene Outlook:

• Current trends and their affect on the butadiene market and its key drivers over the next 12-24 months
• How Argus approaches its 5-year forecast and what industry should be looking out for
• What Northeast Asia capacity additions means for global trade flows
• Other key factors industry needs to stay close to in 2023 and beyond

This podcast is delivered by Argus’ butadiene experts using data and insight from the Argus Butadiene Outlook.

Request a free trial or more information

Transcript

Lauren: Hello, I'm Lauren Williamson, Vice President of Product with the Argus Chemical Sector, and you're listening to our latest edition of Chemical Conversations. Today we're featuring Angie Joe, our Vice President of Crude C4 and Derivatives, discussing the views of our latest Butadiene price and fundamentals forecasting services, including the outlook and analytics.

Lauren: So far in 2023, we've seen the world transition into a new normal with COVID-19 becoming endemic, China lifting COVID restrictions, and a protracted conflict in Russia-Ukraine fundamentally altering energy trade dynamics. The world is watching strong inflationary factors right now and how that might affect consumer demand. So, Angie, how have these trends affected the Butadiene market and its key drivers over the next 12 to 24 months?

Angie: Thanks, Lauren. There's a lot of ground to cover within this question and I know the key for many is when China will waken back up and resume its buying. And so we'll touch on that later in the podcast. But some of the things that I'd like to bring forward to the moment is the Dutch TTF natural gas day-ahead prices. We saw them peak as high as €300 per megawatt hour in August 2022. But then this year, since the second half of February, they've hovered between €35 and €50 per megawatt hour. So this has eased a lot of concerns that Europe had, not everything, but it certainly has helped because what we do know is during this period when there was so much natural gas uncertainty given the supply exposure to Russia by Western Europe, there was a lot of fears and concerns about what that would look like for the next five years and beyond to the natural gas price.

And so we saw European Butadiene producers and also the derivative producers try to incorporate an element of natural gas in their contract price discussions and formulas. And so we've seen less and less of a reliance on this only because natural gas prices have come down so much in Europe. So it's like a sigh of relief there. But on the other hand, we still have central banks in both the U.S. and Europe who continue to raise inflation rates in order to curb inflation. We've also seen some recent bank failures here in the U.S., and as a result of these things, it has really slowed down big-ticket purchases and durables, and also has had a ripple effect in the housing and automotive markets.

And the worst part is, is credits will continue to tighten. Meanwhile, you have other incentives. So, for example, back in February, in order to jumpstart the housing market in China, not the only measure, but there have been a limited number of Chinese banks who actually extended the upper age limit on mortgages to between 80 and 95 years old. And so what that means is someone who is 70 years old can now take out loans with maturities of between 10 to 25 years. Now, there are some other stipulations to that, but that just goes to show you they're looking for a new market of buyers who will actually make purchases on these new homes.

Meanwhile, the automotive supply chain has finally been improving, which is great. But then the other side of the coin is that interest rates continue to move upwards and trade-in values are lower. The final thing that I'd like to mention is tires because as you probably know, a majority of Butadiene goes into tire manufacturing. So recently, Michelin, the French tire maker, showed that Q1 replacement tire volumes are down about 4% globally. For Europe, that meant minus 9%, for the U.S., minus 7%, and China, plus 3%. And the reason why there's so much emphasis on replacement tires is because it represents about 70% of the entire market. Then what we also see in Europe especially is that those who had manufacturing sites in Russia, they've continued to see squeezed margins in Q1.

Lauren: Next, I'd like to draw attention to an important part of the Butadiene Outlook service, which is the published five-year price forecast. Maybe you could tell us how you approached constructing your view for that time period, and what are some of the major items that the industry should be looking out for?

Angie: Like I mentioned in the intro of this podcast is that China has really been the focus, and when it will begin its economic recovery. Many believed that their buying appetite would return with the lifting of COVID restrictions. But instead, what we've seen is the Chinese have been traveling rather than purchasing durable goods like white appliances, electronics, toys, furniture. So that has really slowed global demand down.

Many also believed that the U.S. would have a more resilient economy, especially if you look back to mid-2022 when the U.S. Federal Reserve started raising interest rates. The idea was that with an active central bank curbing inflation, this would really prop up the U.S. economy. But from a crude C4 perspective, this has not been the case. Outside of unplanned supply problems and also planned turnarounds, there hasn't been much spot demand, and we don't anticipate spot demand to increase maybe even for the balance of this year. Of course, there could be some unplanned issues like hurricanes or what have you, but generally speaking, demand is not expected to see a sharp rebound for the balance of the year. So this is one reason why the Americans may have to export BD and potentially even feedstock crude C4 to balance the market.

Lauren: Now, let's stay in that Northeast Asia region for a minute. It looks like that area is gonna be adding the most production capacity in the medium term. So what does that mean specifically for global trade flows?

Angie: Yes, this has been a great concern for many of our customers when we speak to them. There's a fear, especially from Europe and Brazil, who are both net exporters of Butadiene, that Asia-Pacific will stop importing because China is adding so much BD production as well as South Korea and a few other pockets. But what I'd like to remind our customers is that China and the rest of Asia, in addition to adding Butadiene supply, they are rapidly adding derivative projects as well. The issue is that these derivative projects have been slower to come online, and there has been a shift in demand.

So for example, back in late 2020 and into 2021, the real focus was nitrile rubber latex, which goes into medical gloves. But as you know, with the COVID-19 vaccine and the reopening of the global economy, there really hasn't been as much need for these medical gloves. And so instead, what we've seen is projects for ABS, Acrylonitrile Butadiene Styrene, which goes into plastics and other consumer goods, as well as styrene block copolymer, which goes into asphalt modification. And even China saw its first Butadiene-derived adiponitrile production. So we're just seeing the demand shift into other types of projects. But again, the growth is really focused on Asia-Pacific rather than any of the other regions.

Lauren: Are there any other key factors that you are examining closely and feel that the industry needs to stay close to as well while we move deeper into 2023 and beyond?

Angie: Yes. One of the things that could be concerning, it depends on how you look at it, is the recent weakening of the dollar. If you recall back in November 2022, the dollar and the euro reached parity, but by December, so one month later, the dollar-to-euro spread was closer to 1.06, and the April average ended at 1.1. Now, from a BD perspective, what we saw was the May U.S. contract price settled at 47 cents, which was a 2-cent drop in the equivalent of $1036 per ton, while the European monthly contract price fell €10 to €960 or in dollar terms, $1056 per ton and that's using a 1.1 dollar-to-euro exchange rate.

When the market settled at these levels, this is the first time in three years that the European price settled at a premium to the U.S. contract price. From a macro perspective, what a weakening dollar will mean, it will encourage the U.S. to export goods, but at the same time, it will likely chip away at Americans' purchasing power. Finally, the other thing that we'll be looking at from five years and beyond is the growth of electric vehicle market and what that means for tire trends.

Lauren: Angie, thanks for sharing your views with us today and giving us all a glimpse into the trends that you're evaluating as part of the Argus Butadiene Outlook and Analytic Services. For more information, visit us at www.argusmedia.com/chemicals.

For Argus Media, I'm Lauren Williamson. Join us again next time for more insights in our Chemical Conversations podcast series.