By Wang Kaifu, Guo Yating, Zhu Zhiwei, OilChem China

Major product prices rise after falling, mixed operating status

The COVID-19 outbreak pummeled China’s tyre and other rubber products industries in the first half of 2020. Prices of major tyre feedstock, including natural rubber and synthetic rubber rose after initially dropping. Crippled demand after China’s Lunar New Year holiday triggered consecutive declines in feedstock prices, with butadiene rubber (BR), carbon black and some anti-ageing agents posting a year-on-year fall of over 20%. The prices of natural rubber, styrene butadiene rubber (SBR) and isobutylene isoprene rubber (IIR) slipped by 14-20% year on year. In May-June, major feedstock prices rallied. 
   The operating rates of major feedstock showed a mixed trend (see Figure 1). SBR, BR and IIR displayed a better performance than the same period of 2019. SBR and BR registered a notable improvement in theoretical production margins, reaching a record high in recent years. 

       Figure 1 Operating rates of major rubber products

   In January-April 2020, carbon black plants posted a lower operating rate than the same period of last year, with the product prices hovering at low levels, incurring severe losses on producers. Since June, their operating rate spiked as elevated feedstock costs motivated downstream buyers and traders to increase their purchasing volumes. Accelerators and anti-ageing agents plants logged in a dramatic fall in their overall run rate, as the pandemic weighed on downstream production and margins were squeezed by lack of feedstock and higher feedstock costs. 

Pandemic triggers fluctuations in exports

   China’s exports almost ground to a halt in February due to the COVID-19 outbreak. Pent-up demand released in March with the pandemic eased in the domestic market, leading to a sharp rise in export volumes. In April and May, the rampant pandemic in overseas countries again hindered China’s exports. Figure 2 shows major rubber products exports.

       Figure 2 Major rubber products exports

   China exported 7 127.4 tons of SBR in January-May 2020, down by 1 531.46 tons or 17.69% year on year; 257.9 kt of carbon black, down by 65.1 kt or 20.15% year on year. The export volume of accelerators and anti-ageing agents fell by 3.54% and 11.51% year on year respectively over the period. 
   China’s export volume of BR and IIR posted a year-on-year growth. In January-May 2020, China exported 24 161.61 tons of BR, up by 5 802.81 tons or 31.61% year on year. This was mainly because of some sellers’ concerted efforts to explore the export market and competitive export prices, after China’s BR prices slumped to hit a record low. IIR exports reached 6 866.535 tons during the period, up by 10% year on year. Surplus domestic supply, large volumes of unsold inventories and higher export rebates bolstered domestic producers’ enthusiasm in exporting their products.

Outlook

   Natural rubber
   New rubber products output in major domestic and overseas producing regions surged in the third quarter, while downstream tyre sales both at home and broad showed tepid recovery. This led to expectations about worsening supply-demand contradictions, which may pose downside risks on natural rubber prices. However, fewer arrivals of imported products, low inventories of light-colour rubber and the support from domestic and overseas feedstock costs may temper any price drops. Hence, domestic natural rubber prices are likely to fluctuate in the second half of 2020.
   SBR
   Demand was weak in the traditional off-season for downstream industries in July-August, while SBR producers maintained high operating rates and overall inventories were high. In September-October, SBR prices may rally with downstream demand perking up and are likely to sustain gains in November-December.
   BR
   New butadiene plants are expected to start up in the second half of 2020, which may bring about fresh products, sending prices to fluctuate at low levels. Intensive plants maintenance at Yanshan and Qilu Petrochemical in July, followed by expectations about the BR plant turnaround at Yangzi Petrochemical will keep the overall operating rate at 65-73% in the second half of 2020. The tyre industry is likely to see a slow recovery in plants’ run rate and exports. Domestic BR prices may increase from the 1H 2020 level and may hover at RMB7 600-8 800/t.
   IIR
   Domestic IIR prices dropped to record lows in the first half of 2020. Therefore, suppliers showed intention to firm prices. Meanwhile, elevated global crude oil values led to expectations about the increase in feedstock isobutene prices. However, demand lacked momentum to improve as the third quarter is the traditional low production season for downstream industries. IIR prices may largely undergo narrow fluctuations and only inch upwards in the second half of the year. 
   Carbon black
   Demand from the major end-use tyre industry is hard to return to the level of the same period of 2019, clouding the outlook about the carbon black market in the second half of 2020. Their average operating rate may stand at 50-60%, a bit higher than the first half of the year. Average domestic carbon black prices are estimated at RMB4 500-5 200/t, considering reducing supply of coal tar and high feedstock costs. The upside room of carbon black may be capped in the rest of the year. 
   Auxiliaries
   As for accelerators, feedstock costs hover at low levels. The market drew limited support from downstream plants’ operation and the export market. Supply may remain surplus. Prices may lack upward steam. Feedstock costs of anti-ageing agents are likely to fall. This, together with tepid recovery in downstream demand and exports may give limited boost to the anti-ageing agents market. If producers continue to control supply, it is likely to push up prices. Overall, the domestic anti-ageing agents market may be stable-to-softer.