Market boom spurs upward price pressures - Global capacity
constraints won't end until late 2006
A robust demand and a worldwide capacity shortage have combined
to push the prices of phenol up to their highest levels in
several years. Further hikes are likely at least through 2006,
say industry analysts, when new capacity may begin to provide
some relief to the tightness in the market.
Sales of phenol--which has downstream applications in
construction, automotive and electronics--closely track economic
conditions. Demand for the chemical in North America increased
about 17% in 2004 over the previous year, and has remained
strong into the early months of 2005, reports Ben Fitzpatrick,
phenol/acetone business manager at Shell Chemicals, Houston,
Tex.
The main reason, Fitzpatrick says, is that "the economy in
the U.S. has picked up" over the past year. Phenol is also
doing well in Asia, he adds, where overall business conditions
"continue to move forward at a brisk pace."
SUPPLY: Feedstock constraints
Limp margins in the phenol business induced some producers of
cumene, the main feedstock for phenol, to shutter their
production plants a few years ago. The most noteworthy cutback
was the 2003 idling of the 500,000 tons/year Chevron Phillips
Chemical Co. cumene unit in Port Arthur, Tex.
Prior to that shutdown, operating rates for cumene in North
America were about 78%, recalls Chuck Venezia, vice president
for benzene and derivatives at chemicals consultant DeWitt &
Co., Houston, Tex. After the closure, he adds, operating rates
leaped to 94% to 95% in 2004, forcing phenol producers to
scramble to find adequate cumene. Cumene still remains
"very, very tight," says Venezia.
Phenol is produced by the peroxidation of cumene
(isopropylbenzene), a process that yields another important
chemical building block, acetone, as a co-product. Cumene itself
is derived from two petrochemical feedstocks, benzene and
propylene. As a result, price and availability of phenol are
strongly dependent on crude oil prices and on petroleum refinery
capacities.
Worldwide capacity of phenol in 2004 was 8.25 million metric
tons, less than a 2% increase from 2003, reports Ben Smith,
director of phenolics and nylon intermediates at the research
firm Chemical Market Associates, Inc. (CMAI) in Houston, Tex.
According to CMAI, the major phenol producers, and their share
of the market, are Ineos Phenol, with around 20%; Sunoco, near
9%; Mitsui Chemical, near 7%; Shell Chemicals, 6%; and Formosa
Plastics, around 5%.
The hydrocarbon feedstocks for phenol "are going to remain
extremely tight to short globally, at least for the next couple
of years," predicts Fitzpatrick. Relief is unlikely, he
adds, before late 2006 or early 2007, when new petroleum
reformers are due online. And the propylene needed to make
cumene, he says, currently is in particularly short supply.
As for phenol itself, several expansion projects are in the
works in response to improved market conditions. For example,
Ineos Phenol plans to expand capacity at its 450,000 ton/year
Antwerp, Belgium phenol plant to 640,000 tons/year by late 2006.
DEMAND: Housing is strong
Phenol is a raw material for phenolic resins, polycarbonate and
epoxy plastics, and some grades of nylon. As a result, the
vigorous performance of industries that use these
products--housing, automotive and electronics--is helping to
boost phenol sales. About 7.5 million metric tons of phenol were
sold in 2004, notes CMAI. Smith projects that worldwide phenol
demand will grow between 4% to 6% annually over the next five
years.
The housing market for phenol products has been "remarkably
strong," says Venezia. Automotive sales have also been
solid, he adds, although he cautions that this sector "is
just starting to show a little weakness."
Current low interest rates have spawned a wave of home
refinancings and resulting home improvements, which Venezia says
has caused a run on construction materials based on phenolic
resins. (These materials include plywood, some types of home
insulation, and decorative laminates for kitchen and bathroom
countertops and cabinets.)
Rebuilding in the wake of several recent natural disasters,
including the round of hurricanes in Florida and the Asian
tsunami tragedy, has also upped demand for phenol-based
construction materials, Venezia adds. Meanwhile, Smith cites the
expanding popularity of CDs and DVDs, both made of
phenol-derived polycarbonates, as another factor behind phenol's
strong showing.
The surge in sales has driven phenol producers to the limits of
their capabilities. Capacity utilization for phenol in North
America was "essentially 100%" in 2004, says
Fitzpatrick. Worldwide, the utilization rate for phenol reached
91% in 2004, says Smith, which he calls "a strong increase
over the previous year." PRICING: On the ascent
The heated activity in end-use markets has helped propel phenol
price tags to new highs (see chart). Even with a sizable run-up
in their feedstock costs, says Venezia, "phenol producers
have done quite well" this year. That statement is borne
out, for example, by Sunoco's fourth-quarter 2004 margins for
phenol and related products, which were 40% higher than they
were in the same 2003 period. The company credits higher phenol
prices for the dramatic margin improvement.
Contributing to rising price tags for phenol in North America,
says Venezia, is a thriving market in Asia, which has bid up the
price of the chemical worldwide. New phenol capacity coming
onstream in Asia this year may lessen price pressures a bit, he
adds.
For the present, however, upward momentum continues for prices.
This has forced purchasers of phenol to pass along their higher
costs to their customers. For example, resin producer
Schenectady International has announced several price increases
for its phenolic resins since the middle of 2004. The
Schenectady, N.Y.-based company says the hikes have been
necessitated by "continued extreme volatility in the
benzene/phenol markets."
Meanwhile, the rapid price escalation in benzene and propylene
has made providers of these two feedstocks skittish about
negotiating the standard three-month supply contracts at fixed
rates with their customers in the phenol industry, according to
Venezia. He says that a number of benzene and propylene
suppliers are increasingly insisting on monthly negotiated
contracts, "which transfer the risks of price volatility to
the downstream [phenol] side."
Higher feedstock costs, together with a number of supply/demand
factors, should continue to put upward pressure on phenol prices
as 2005 unfolds, says Fitzpatrick. He adds, however, that price
pressures this year should not be any worse than last year,
unless there are phenol shortages caused by unexpected service
interruptions at production facilities.