Prices of phenol have been trending upward for the past year. This factor, together with an uptick in demand, has helped restore some profitability to beleaguered phenol producers, who saw their margins crumble in the 2001 to 2002 period due to sagging demand and weak pricing.

Future phenol tags are hard to predict, say industry analysts, because of uncertainties about the future cost of crude oil and general economic conditions. But for now, higher rates have "improved" margins within the industry, says one phenol producer.

Disappointing margins caused many phenol suppliers to cut back their production during the past year. "These plants have not reopened and they won't anytime soon," says Ben Fitzpatrick, business manager for phenol and acetone at Shell Chemical Co., Houston, Texas. Supply woes for phenol purchasers will likely be worsened by Chevron Phillips Chemical Co.'s decision in June to close its plant in Port Arthur, Texas that makes cumene, the key feedstock for phenol. Idling of that unit, expected by the end of the year, will be "a big issue" for phenol producers, notes Fitzpatrick, especially for those who are not fully back-integrated in the phenol supply chain.

The typical industrial route to phenol is the peroxidiation of cumene, which produces acetone as a co-product. (The feedstocks for cumene are benzene and propylene, prices of which are dependent on tags of the crude oil from which they are derived.) Some 6.7 million metric tons of phenol were produced globally in 2002, according to Chemical Market Associates Inc. (CMAI), Houston. The top phenol producers by region were North America, with 35% of the total output, Western Europe, with 32%, and Northeast Asia, with 22%, CMAI reports. The largest North American phenol producers are the Sun Co., with 33% of capacity, Shell Chemical, with 19%, and Ineos Phenol, with 14%, according to CMAI. Other leading producers are Mount Vernon Phenol, Dow Chemical and Georgia Gulf Corp.

The phenol operating rate plummeted in North America from 99% in 1999 to 73% in 2001, notes Ben Smith, director of phenolics and nylon intermediates studies at CMAI. This reflected both the excess phenol capacity that came onstream and the downturn in demand during that period, he explains. But operating rates rebounded to 82% in 2002 as some capacity was taken offline and demand improved.

Phenol is a raw material for phenolic resins, polycarbonate and epoxy plastics, and some grades of nylon. Sales of phenol are therefore closely linked to business conditions in the sectors where its end products are widely used—housing and construction, automotive, computers and electronics, and fibers.

Demand for phenol in North America dropped almost 14% between 2000 and 2001, but moved up 4% between 2001 and 2002, the CMAI figures show. Annual growth in phenol consumption should average 4-5% over the next five years, Smith predicts. With little new capacity expected during that period, this growth will push operating rates past the 90% mark by 2005, he notes.

Among phenol end markets, "housing is pretty strong and autos have been doing fairly well too," says Fitzpatrick. Another outlet, polycarbonates, which are tied to computers and telecommunications, "are not where they were in 2000," he adds, "but are also growing nicely." On the international scene, Fitzpatrick notes that "Asia is coming back from the SARS crisis." One weakness that could put the brakes on phenol growth in the U.S., says Fitzpatrick, is "a persistent lack of capital investment by business." Such investments, he adds, encourage expansions of plants and offices, and purchases of equipment, which boost the construction, computer, telecommunications and other industries that consume phenol.

The upward climb of phenol prices since early 2002 continued into this year (see chart). The rising tags are due largely to escalation in the costs of feedstocks and energy, particularly crude oil and natural gas, notes Fitzpatrick. But supply and demand factors, such as the imminent shutdown of the Chevron Phillips cumene plant, will probably exert upward pressure on phenol tags in the future, he adds. How long phenol prices will go up before they retreat "is hard to ascertain," Fitzpatrick says. Predicting the future price of crude oil, for example, is a notoriously dicey proposition, he says.

But the soaring tags have been less well received by purchasers of phenolic products. At Dana Brake and Chassis, a large McHenry, Ill., auto parts manufacturer, Frank Boccia, director of supplier development, says his company was hit last April with increases of 9-11% in the prices of phenolic resins it purchases. That was in addition to hikes earlier in the year that were "substantial, but not as great," he recalls. The double whammy "certainly hurt us," Boccia says, because the phenolic resins are critical raw materials for Dana. It also hindered Dana's corporate goal of reducing costs of its raw materials by 2-3% a year, he adds. Boccia frets that the worst may not be over. "Our contracts allow our [phenolic resin] suppliers to index their prices to the price of phenol," he says.