H1 Outlook: Asia butadiene, SBR mixed amid maintenance season, trade war uncertainty

The Asian butadiene market is likely to be stable to firm in the first half of 2019 as tight supplies from heavy plant maintenance may be offset by additional capacity expansions as well as bearish downstream markets, sources said.

Butadiene supply is expected to be balanced to slightly tight in H1 due to planned turnarounds in Asia as well as Europe. In South Korea, LG Chem, Kumho Petrochemicals, Hanwha Total and YNCC are due to shut their butadiene plants, while JSR will shut its Chiba butadiene unit.

As for China, the rest of Southeast Asia and South Asia, there will be few turnarounds, ensuring a relatively stable supply of butadiene from non-South Korean sources.

In addition, butadiene plant turnarounds in Europe would likely limit deepsea supplies. Among others, major producers like Shell is expected to take its Moerdijk cracker for maintenance over April-June, Ineos' Dormagen's butadiene extraction unit will undergo turnaround over March-May, BASF's Antwerpen cracker and extraction unit is planned for maintenance from May to June, while Dow's Boehlen cracker will undergo maintenance over May-June. This is expected to be Europe's first heavy turnaround year in many years.

Major downstream buyers such as France's Butachimie and Michelin's Bassens downstream plants are also scheduled for maintenance sometime in first-half 2019.

However, these tighter supply fundamentals may be disrupted by major new capacities coming online, with Malaysia's Petronas-Aramco RAPID set to add an extra 185,000/mt a year of butadiene production capacity to the market by the first half of the year. However, some market sources said the startup may be delayed until late 2019.

As for major additional capacity in China in the form of Zhejiang Rongsheng's 200,000 mt/year butadiene capacity, there is some uncertainty as to whether this will launch in Q2 2019 as earlier proposed by the company.

Should both these capacities come fully online, it is expected to weaken butadiene prices as supply tightness eases. Also, additional capacity within the Chinese market may mean that China's butadiene import requirement may fall in 2019.

One vital trend in the latter half of 2018 was the return of Chinese buyers to the import market. In H2 2018, particularly from September onwards, domestic spot cargoes were priced lower than import cargoes on an import parity basis, opening an attractive import-domestic arbitrage window for Chinese buyers to procure imports. This window remained relatively wide, with the import-domestic spread at above $100/mt from September to mid-November, 2018, imports being the cheaper of the two.

With much tighter supply fundamentals expected in H1 2019, and no major scheduled turnarounds in China during this period, import prices may exceed that of Chinese domestic prices, rendering the window for Chinese buyers to procure imported butadiene at cheaper prices closed. This expectation is further confirmed by stable to weak indications given by Chinese market players on the domestic Chinese market, indicating that the possibility of procuring ample, cheaper cargoes within China could be strong.

Despite tight butadiene supplies and uncertainty in downstream markets due to the US-China trade war, market sources said end-users have requested for reduced term volumes for 2019, by as much as 10%-20% lower from volumes procured for 2018.

"This year, I have customers asking for around 50% of their required butadiene volumes to be on term. Last year, they mostly contracted 60% of their feedstock," he said, adding that customers were allocating a greater percentage of their requirement to spot purchase in anticipation of cheaper prices.

Another producer, currently in the middle of term contract discussions, agreed. He said the uncertainty surrounding the US-China trade war and the expectation of poor performance in the downstream synthetic rubber and acrylonitrile butadiene styrene markets, had driven buyers to request for lesser volumes in their new term contracts.

This was confirmed by several ABS and synthetic rubber makers. "We need to leave ample room for uncertain market conditions," one buyer said. At the time of publishing, other major Asian producers had yet to complete their term negotiations.

The ongoing US-China trade war had impacted butadiene downstream markets, mainly ABS and SBR in 2018.

Initially, the US was set to raise tariff rates to 25% in January. However in November, the US and Chinese governments announced a 90-day truce until March, in which no additional tariffs will be implemented.

Initial reactions from downstream markets were positive for the short term, but producers said that this was a shallow victory.

"Manufacturers are still worried over the pending decision [on tariffs]. It leaves them more uncertain," one producer said, adding that this is pushing buyers to look for more spot volumes rather than contract cargoes. This is particularly difficult for SBR makers, especially during the end-of-year contract negotiation period.

In 2018, the CFR China ABS price slumped to $1,410/mt in November, the lowest since October 2016, while the CFR Northeast Asia SBR price fell to $1,345/mt in December, the lowest level since June 2017, S&P Global Platts data showed.