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.