Up 15-20% in two months, with output cuts adding to pressure might not sutain, say observers

Petrochemical prices have risen sharply since July in the wake of the surge is crude oil, from which these are derived, and those of naphtha, an important feedstock. Crude oil has risen almost 20 per cent during the period.

Many oil refineries have shut production for a number of reasons in recent months. Refinery and pipeline problems in the US Midwest and California, tropical storms moving from the Gulf of Mexico and refiners selling inventories to avoid a surplus when they switch to processing winter blends of fuel in the coming month have pushed prices higher, said an analysis by Capitaline.

The petrochemicals index of PLATTS, the premier energy sector observer, has risen 24.2 per cent from $1,099 per tonne at the beginning of July to $1,366 per tonne as of now. The index represents the average global price of petrochemicals. Indian consumers are hit even more by the rupee’s falling value against the dollar, making the raw material for various plastics, textiles and feedstock costlier. India is a net importer of the byproduct and domestic prices are set by tracking international price levels, with a month’s lag. Most product prices here have gone up by 10-15 per cent in two months. Prices for benzene, used as an aromatic chemical, have been rising significantly on the back of high naphtha prices. Production of benzene has been declining significantly from its peaks on a month-on-month (m-o-m) basis.

Explaining the reasons for production cuts globally, which has resulted in a spike in prices, Ihsan Rahim, senior managing editor, Asia, Platts Petrochemicals & Soft Commodities, said: “A trend is clearly emerging that consumers' vision is longer and they look beyond what producers are looking and, hence, fearing several concerns that are emerging, they cut their consumptions, and producers have to just follow them by cutting production. Producers are finding difficult to judge changing consumers’ preferences.”

Paraxylene and naphtha are major gainers globally. Paraxylene was up 20 per cent on two months while naphtha was up nearly 30 per cent and trading at $1,000 a tonne.

Rahim explains, “Butadiene is in demand for producing tyres, whose demand is still high, and hence the prices. Paraxylene is another commodity whose prices are rising faster and independently of other petrochemicals - cotton is becoming costlier and as its substitute, synthetic textile is in demand, which is made using PTA, for which paraxylene is the key raw material. Naphtha prices are rising and might continue to rise till alternative gas is available, which is ethane. Efforts are on in the US to increase its production. Heavy naphtha is required for producing paraxylene and, hence, naphtha prices are also rising fast.”

In the Indian market, according to Capitaline data, benzene prices are higher by 27 per cent, year-on-year, at Rs 73,817 per tonne. However, over recent months, prices are lower due to slow capacity additions in major segments like linear alkyl-benzene (LAB), caprolactam and phenol, which together accounted for 72 per cent of total domestic demand for benzene in 2011. Globally, benzene prices went up 12.7 per cent in two months.

LAB is a vital ingredient in detergents, pesticides and the paint industry. Healthy demand in the Indian markets also boosted prices. The rainy season, which leaves the industry parched for buyers, was not a detterent this year, as the onset of monsoon was delayed in India, boosting prices.
 

Smaller plastic processors have been crying foul due to the steep rise in prices but industry leaders are better placed. M P Taparia, managing director, Supreme Industries, said, “While in the plastic furniture segment we have cut production because we were not able to pass on the full cost increase, though we have not seen demand contraction at existing prices, in other segments such as plastic pipes and industrial components, we been able to pass on rising costs and also not seen demand contraction.”

What is the road ahead? Rahim said,“This seasonal strong movement in petrochemical prices seems over-bought. Prices are too high for comfort and demand for end-products to stock the Christmas shelves in the Western economies might not manifest itself.”