The prices of key raw materials TDI and MDI have been at elevated levels for a number of years. James Elliott, principal analyst at IHS Markit, explained the reasons behind the continuing high prices to delegates at UTECH Europe 2018.
Price is one of the most important considerations in many areas of trade and commerce. Prices of the key polyurethane raw materials MDI and TDI have been at particularly high levels for many months.
At the heart of all business is the cost of producing the products we sell or buy.
Production costs are fundamentally important to all commodities. They provide insight into price contract negotiations. They provide insight into export opportunities and import threats. They allow us to benchmark regional production costs. From the production costs, we can derive plant profitability, and we can use this to analyse where we are in the margin and investment cycles. We can use this information to make strategic decisions.
It allows us to determine whether the seller’s price high because of high input costs, or whether there is another reason.
IHS Markit has developed a robust method to find the base cost of production of model plants in North America, Western Europe and China. The approach is straightforward: production costs equal raw material costs, plus other variable costs, plus fixed costs, minus by-product credits.
This approach allows us to understand some market fundamentals.
Looking at the Chinese MDI market in two snapshot years, 2015 and 2017, we see that in 2015 the Chinese market value was worth about CNY 21bn. This increased by 137% in 2017 to more than CNY 50bn. The average annual polymeric MDI price over these two periods was about CNY 11,000/tonne, increasing to about CNY 24,000/tonne in 2017.
Based on these data, one might think that a Chinese MDI plant in 2017 was much more profitable than it was in 2015. But the total cost of production is unknown, so we cannot calculate the margin or derive the profitability.
In 2015, our model shows that the MDI total cost of production was about CNY 8,000/tonne. This increased by 16% in 2017 to about CNY 9,300/tonne. The model MDI plant in 2017 was far more profitable compared to 2015.
This is because selling prices increased on the back of tight supply and demand dynamics in the MDI market in China and around the world, rather than cost-driven price increases.
These data give us information to help us decide the stance we should take in short-term contract negotiations. We can derive plant profitability, and analyse where we are in the margin and investment cycles.
We consider three model MDI plants in three different locations: the US in North America; Germany in Western Europe; and China in north-east Asia. We consider the capacity for each of the plants as 300 kT/year in the US and Germany and 600 kT/year in China. These are based on the amount of new capacity entering the market in 2012, the start of our cash costs model.
Making MDI is complex and involves the convergence of different chemical value chains. We consider four distinct steps in our MDI cost model. The first step is nitration of benzene to nitrobenzene; step two is the hydrogenation of nitrobenzene into aniline; step three is the production of phosgene; and step four is phosgenation to produce MDI, as shown in Fig. 1.