As crude oil and all related markets fell with shocking speed in response to deepening fears over the impact of the COVID-19 pandemic, the maleic anhydride market struggled to keep up. Most buyers and sellers stayed away from the market, highlighting the difficulty in making decisions when events are changing so quickly. The market headed into this scenario with good demand in February in the US and fair demand in Europe. In fact, pricing in Europe was quite firm in February and early March and the US was stable. Now, all bets are off.
Having said that, there are some facts we can work with. The crude price has come down to around $23/bbl on 19 March and the n-butane price was at 23-24 c/gal on the same day. The current butane price is down from around 79 c/gal on 24 February. What a difference a few weeks makes! At the beginning of March, we looked at lower n-butane prices and expected that these would probably drag maleic anhydride values down with them. But by 19 March, it is far from clear what to expect. It is unlikely that prices will rebound dramatically but some upward correction is possible, especially if crude oil prices respond positively to proposed changes in supply, while still reflecting severe demand destruction.
So far, European and US maleic anhydride markets are steady. Customers are not yet asking for lower prices in either geography and mostly we are all focussed on how COVID-19 is changing the business world as well as our personal lives. From our home offices, we look at this changing world and see the sharp erosion of pricing and at the same time, outside our windows, while most plants appear to be still running, logistics are under enormous pressure.
In Europe, the closure of EU borders from Tuesday 17 March has created delays as trucks are seeing long lines to be checked before coming or going from the EU, according to a producer selling into the region. There were unconfirmed reports from Italian consumers that they had faced cancellations of supply from a central European producer. This producer could not be reached for comment.
Trying to get a longer view is very difficult at this point. If we look back to what happened in 2008- 2009, many in the chemical industry cut their inventory levels to the bone and undertook layoffs and reductions in operating rates, and in some extreme cases, shutdowns. Maleic anhydride faces particular challenges in this respect; as a product that is not easy to transport or store, the overall level of inventories seems unlikely to change much. Sellers will be trying to hang on to pricing for March despite the free fall in feedstock pricing. One US producer pointed out that the average n-butane price for March in the US was still around 47 c/gal, despite the fall to 23 c/gal. March business is basically done at rollover levels. For Europe, similarly, producers were holding onto current spot prices, where they had made gains in February. These suppliers were keen to stress that reliability of supply was key to buyers in uncertain times but in fact, all sites are vulnerable at this point. At the current epicentre of the pandemic, PolyntReichhold’s plant near the northern Italian town of Bergamo was the subject of much speculation. Customers report that it is still running but it has been impossible to reach anyone at PolyntReichhold for comment. With a spot benzene price for April of $335/ton, the economics of running this plant are better than they have been in quite some time.
The impact on the downstream markets is still unclear. Automotive has been the worst hit sector and the fastest to respond to the downturn. Although February US light vehicle sales reached a seasonally adjusted annualized rate of 17.04 million units and several major automakers posted higher sales in February, according to Automotive News, the outlook for March sales is very different as US buyers stay at home and showrooms remain quiet. RBC Capital Markets forecast that soft global demand could send US automotive production down by around 16%. In Europe, as in North America, much automotive production is being temporarily shuttered in March. Ford is suspending vehicle and engine production in Europe in response to the COVID-19 virus, along with other manufacturers, including BMW, Toyota, Daimler, Volkswagen and Ferrari.
There are not yet any statistics regarding housing and construction that reflect the impact of the COVID-19 pandemic. But if we look at the impact on all markets in China, which is a few weeks ahead of Europe and the US, the Caixin China General Manufacturing PMI declined at a record pace in February due to the spread of the COVID-19 virus. The PMI was reported at 40.3, down from 51.1 in January. This was the lowest PMI reading since the survey began in April 2004. Production fell sharply, ending a six month period of rising output, as many firms closed or operated below capacity due to restrictions put in place by the government to curb the spread of the virus. The total new work received by manufacturers declined steeply, and was the first drop in sales since June 2019. New export demand also fell at a rapid rate. Buying activity was down drastically, and travel restrictions and company shutdowns led to the fastest deterioration in vendor performance on record. Cost pressures were subdued, as input prices rose only marginally in February, but factory gate prices fell for the first time in three months.
Sadly, for China, the market there is finally ramping back up at a time when other major consuming markets, like the US and Europe, are shuttering demand as their citizens hunker down at home. We have seen UPR and maleic plants restarting in China but outlets for this product may be limited to Asian markets, displacing some of the output from South Korea and Taiwan, which regularly flows to Europe and the US.
All in all, as markets for crude oil and butanes waver at these very low levels, it will be necessarily some time before the maleic anhydride market catches up. Also, in the context of many unpredictable but highly possible supply disruptions, buyers may be prepared to leave well enough alone with maleic as long as they are getting regular supply. At the same time, some of these downstream plants may face declining orders and reduced operating rates themselves. And both buyers and sellers are vulnerable to logistics disruptions. At a time of deep uncertainty, markets like maleic anhydride will look to good communication and clear and consistent business practises to maintain a good visibility as we drive carefully forward into a murky future.