Vitamin E: Nervous Global Market.
The global Vitamin E feedgrade market has adopted a nervous tone with buyers in several geographic regions now actively looking to contract their Q2 2010 needs.
This is in contrast to the bearish tone which was present in the market in recent weeks. During December and January the majority of end users had anticipated weaker Q2 2010 prices on the back of sluggish global demand and the expectation that producers would compete aggressively to regain business lost during the economic crisis. As a result, the market traded spot during late Q4 and early Q1 2010 and forward cover past March 2010 has been almost non existent.
However, the tone of the market has now changed and several factors have prompted end users to re-consider their strategy and look towards booking forward needs.
Issues which are now influencing buyer behavior include the fact that up to 70% of the world's production will be disrupted during late February / March as a result of plant shutdowns.
In China, the two key producers have announced that they will stop production of Vitamin E during Chinese new year for a minimum period of 2 - 3 weeks. Chinese new year celebrations are having an increasingly disruptive impact on industrial output in China. This is largely due to the fact that workers are becoming more affluent and shifting towards 'western lifestyles' where vacation periods are longer. Overtime pay during such periods is now very high and the cost of maintaining production facilities in operation during Chinese new year has become dissuasive.
The world's largest Vitamin E producer recently announced officially that they would undergo a maintenance shutdown during march 2010. This means that 3 out of 4 production facilities will be out of operation between week 7 and week 12 of this year.
Output matching demand
The economic crisis has forced the chemical industry to change its production strategy. In the past, facilities were operated at close to maximum utilization rates in order to achieve lowest unit costs. In such a scenario global inventories were abundant due to plants operating at close to full capacities.
In the aftermath of the economic crisis, industry has adopted a conservative approach to inventory management. Industrial output is now aligned more closely to visible demand. The consequence of this behavior is that interruptions to output are more frequent as producers try to avoid inventory build-up which would ultimately lead to lower plant utilization rates. Low plant utilization rates drive up unit costs of production.
The above scenario is also applicable to the Vitamin E market where production is directly linked to the chemical industry. Sluggish global demand is prompting Vitamin E producers to reduce output in order to avoid inventory build-up. This behavior is forcing premixers to pay close attention to their forward needs and ultimately means that the risk attached to inventory management is now carried by the end users rather than producers.
The fact that Q2 2010 coverage is practically non existent could create a dilemma for end users. Producers might extent their shutdown periods if they do not see concrete demand developing for Q2. This could lead to a temporary shortage of supply and price spike if the market suddenly covers at late notice.
In NAFTA most recent quotations have been in a range USD 18.00 Kg - USD 18.30 Kg. Isolated cases of closer to USD 17.50 Kg - USD 17.80 kg were reported during December and January for restricted volumes offered on an ex stock basis. Available product at such levels now appears to have disappeared from the market.
In Europe, producers have been offering Q2 volumes at around EUR 12.80 Kg - EUR 13.25 Kg. Restricted volumes of traded product (mostly Chinese origin) was offered for February - April at around EUR 12.45 Kg - EUR 12.55 Kg. In recent days the lower levels have been disappearing as traders adjusted quotations higher in line with a stronger dollar and a firmer tone to the market.
Premixers must now decide whether to gamble on weaker pricing after Chinese new year or to "play safe" and secure volumes at current pricing - just in case one or more producers decide it makes better economic sense to extend their plant shutdowns in light of uncertain demand.