Market outlook: China butadiene and synthetic rubber in crisis

A slump in auto demand growth has occurred as substantial new butadiene, synthetic rubber and tyre capacities continue to come on stream

What goes up can quite often come crashing down, as is the case with China's butadiene (BD), synthetic rubber and auto tyre markets.

In 2009, in the midst of the Chinese government's huge economic stimulus programme designed to mitigate the domestic impact of the global financial crisis, production growth for autos was a staggering 48.3%, as demand growth also surged by more than 20%, according to auto industry sources. During that year, China also surpassed the US to become the world's biggest producer of autos.

Copyright: Rex Features

And in 2010, production growth moderated only slightly to 33.8% as demand continued to surge, thanks to the lingering impact of the economic stimulus package.

This perhaps created the impression that China was entering a new era of sustained exceptionally high demand growth.

But ever since 2011, when Beijing began to put the shackles on an overheated economy, and the central and local governments started to introduce restrictions on ownership growth designed to deal with congestion and pollution problems, the market has endured a relative slump.

For instance, this year demand growth is expected to be below 10%, perhaps as little as 5%, say auto industry sources.

This moderation in growth is occurring as butadiene, synthetic rubber and tyre capacities continue to increase.

Meanwhile, natural rubber stocks are at record highs, leading to a slump in both natural and synthetic rubber pricing. Natural rubber can be substituted for the synthetic rubbers styrene butadiene rubber (SBR) and polybutadiene rubber (PBR) in tyre production.

As we move further upstream, China's butadiene market has been mainly weak since February, according to both producers and traders.

There was a brief rebound in pricing from late April until early May, but as this article went to press, domestic pricing had once again retreated.

NEW RUBBER CAPACITIES
"Confidence is very low at the moment because of the state of the economy," said a butadiene industry source. "This has caused a reduction in speculative trading in butadiene. Speculation had surged because of huge margins, but because demand has been weak for a long time now, many traders have retreated".

This slump in confidence has occurred as new synthetic-rubber capacities have come on stream.

For example, Sinopec Maoming started up a 100,000 tonne/year PBR plant at Maoming, in Guangdong province, in late February. And the Transfar Group commissioned another 100,000 tonne/year PBR facility - this time at Jiaxing, Zhejiang province - in late April.

YPC-GPRO (Nanjing) Rubber Company started up a 100,000 tonne/year PBR plant at Nanjing in Jiangsu province on 1 June.

Not surprisingly, this has led to a surge in synthetic rubber stocks. Market sources estimate total inventories of SBR and PBR (it is difficult to estimate the stocks of each of the different rubbers) at between 200,000 and 250,000 tonnes. Last year stocks were thought to total less than 180,000 tonnes.

It is the same story in natural rubber. The problem dates back to around 2003, when there was a big increase in rubber tree planting in southeast Asia because the consensus was that the market would remain tight.

Instead, natural rubber swung into severe oversupply from 2011.

Inventories of natural rubber in Qingdao bonded warehouses in Shandong province are estimated to total around 350,000 tonnes, the equivalent of one month's consumption. Shandong is China's main tyre producing region. For most of 2012, stocks were around 250,000 tonnes, and before the global financial crisis in 2008 they averaged less than 150,000 tonnes.

What changed postcrisis - and this also applies to most chemicals and polymers, including butadiene and synthetic rubber - is that there was a huge increase in speculation in natural rubber because of the big rise in the availability of bank lending.

But ever since April 2011, natural rubber prices on the Shanghai Futures Exchange, and thus physical prices, have been weak.

This is again the result of government efforts to cool the economy and the big rise in natural rubber supply.

As we go back upstream with butadiene, the good news is that the butene-1 and butene-2 feedstock needed to run a large amount of new on-purpose butadiene capacity in China has become very expensive.

This has limited the operating rate at on-purpose plants that have already come on stream to just 50% (see table for a full list of both new on-purpose butadiene capacities and those linked to liquids cracking).

Most butadiene in China, as is the case globally, is produced via liquids steam cracking, which produces "crude C4s" or C4s, described as C4s on the table. C4s are a co- or byproduct of steam cracking. Butadiene is extracted from the C4s stream.

There is another route to butadiene. Methyl tertiary butyl ether (MTBE), the gasoline octane and oxygenate booster, is first of all produced from methanol and isobutylene. Isobutylene is also part of the crude C4s stream from the cracker. Isobutylene is also extracted from steam cracker C4s streams and sent to MTBE plants.

MTBE plants also have co- or byproducts left over when their reaction process is complete: butene-1 and butene-2, collectively also called n-butene, as is again the case in our table. On-purpose butadiene is then produced from n-butenes, using the oxidative dehydrogenation process.

Shandong, as we mentioned, is a major tyre producing region. It is also the location of several MTBE plants, next to which these new on-purpose butadiene units have been built.

The problem for the new units, and hence the good news for butadiene supply, is that the alternative value of n-butene as a gasoline blend stock is very hi