SBS Value Chain Transmission Logic with International Crude Oil Price Hovering at Highs
Snapshot: In recent two months, the international crude oil price has been rising. The price of WTI hovered around $80/bbl, influencing the price trend of commodities. In terms of SBS, the rising crude oil price also has deep impact on the cost and profit change in all links of the value chain.
The position of SBS in the crude oil industrial chain and the importance of related feedstock.
SBS is a downstream product of crude oil at the end of the industrial chain. The downstream industries of SBS are end application products. The major upstream feedstock is butadiene and styrene. Therein, producing 1mt dry SBS generally consumes 0.6-0.7mt butadiene and 0.3-0.4mt styrene. As butadiene accounts for a large proportion of the SBS feedstock, and the SBS market competition gets fiercer with an overcapacity, the profit at SBS enterprises has been significantly squeezed. Therefore, the butadiene price has more influence on the SBS price change and possesses a prominent position in the industrial chain during the process of cost transmission.
SBS Industrial Chain
Source: SCI
Cost transmission analysis of the major feedstock to SBS with the international crude oil price hovering at highs
Recently, the international crude oil price has trended at highs. The price of WTI fluctuated around $80/bbl, influencing the commodity prices. The change in the international crude oil price had logical transmission to the feedstock prices, especially to the butadiene market price.
In detail, ethylene and propylene account for over 50% of the products in ethylene crackers. The profit of ethylene and propylene decides the profit of the whole ethylene cracker. At petrochemical enterprises, ethylene and propylene are processed into plastic products. Thus, the profit of PP and PE decides the profit of ethylene and propylene. Finally, the profit of PP and PE reflects that of the ethylene cracker objectively. In another word, the operating rate of the ethylene cracker is closely related to the profit of PP and PE.
As a product of mixed carbon 4 extraction process, butadiene has low contribution to the profit of the ethylene cracker, so it has some dependent characteristics. Recently, the PP and PE industries, as major downstream industries of ethylene and propylene, have faced continuous losses. Therein, the PP industry has faced higher losses since May, while the PE industry has been in losses for over two months. Up to August 24, the PP and PE industries faced losses of around RMB 1,310/mt and RMB 560/mt respectively. Meanwhile, due to losses, overseas ethylene crackers cut production and ran at lower loads intensively, especially for the crackers in South Korea, Southeast Asia and Taiwan, China. In result, the butadiene output in Asia declined except for China, which was the major reason for the rise in the import price of butadiene recently.
As the prices of major feedstock butadiene and styrene hovered at highs, the SBS price faced headwinds in rising high. The prices of butadiene and styrene directly influence the cost and profit of SBS. Up to August 24, the EXW prices of butadiene and styrene at Sinopec were RMB 7,600/mt and RMB 8,800/mt, up 5.56% and 8.65% Y-O-Y respectively. Referring to the methodology of cost and profit of the Bailing major dry SBS grade, the average gross profit was only RMB 380/mt theoretically on August 24, which was at a low level.
The cost transmission of SBS to downstream industries was hindered.
According to NBS, the growth rate of newly started area and completed area in the real estate industry began to diverge in 2023. In January-July 2023, the newly started area in the real estate industry decreased by 24.5% Y-O-Y. The growth of infrastructure investments constantly slowed down. According to NBS, in January-July 2023, the total infrastructure investments increased by 6.8% Y-O-Y. The Y-O-Y increment was 0.4 percentage points lower than that in the total infrastructure investment in January-June 2023. In January-July 2023, the total value of imports and exports was RMB 23.5521 trillion, up 0.4% Y-O-Y. Therein, the export value was RMB 13.4728 trillion, up 1.5% Y-O-Y. However, the export value was only 2.016 trillion, down 9.2% Y-O-Y.
The infrastructure investments, exports and the real estate industry have influence on the SBS downstream industries, including the modified bitumen, shoe material and modified bitumen waterproof roll industries. According to the data of NBS from January to July, the exports and domestic orders underperformed, curbing the operating rate of the shoe material industry. The real estate industry was still in the process of hitting the bottom. The operating rate of the waterproof roll industry was lower than that before the public emergency. The operating rate of the modified bitumen industry stayed low due to the fund environment, and players held weaker expectations of the demand peak season in September and October. As the overall downstream consumption of SBS was tepid, the SBS market lacked support from demand. In the cost transmission from upstream industries to downstream industries, the development of downstream industries was insipid, especially that of the waterproof and shoe material industries where competition intensified. Thus, the profit at producers was squeezed.
Overall, the international crude oil price fluctuated at highs, bolstering the price of the SBS feedstock butadiene indirectly. In terms of the relationship between SBS and downstream industries, the cost pressure from the rising feedstock prices was hindered to transfer to downstream industries, failing to constantly bolster the rise in the SBS prices. Therefore, the profit of SBS stayed low. In addition, the SBS market is expected to be influenced by the transmission logic above in the medium and long term, if the international crude oil price remains high in the future.
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