Inventories a real headache throughout the supply chain

16 October 2001 17:12  [Source: ICIS news]

Was it all a touch of late summer madness? Trying to push up prices earlier this month, some in the industry were talking of tightening inventories. Purchasers had run stocks to low enough levels to prompt a wave of buying, the thinking went. The industry, perhaps, was on the move up again.

Unfortunately, this has hardly been the case. Looked at from the end-user perspective it is not difficult to see why; September was a bad month and activity in some sectors of industry all but stopped after 11 September. The underlying weakness in the US economy and increasingly in Europe and Asia meant that chemicals demand growth continued to slow.

Just look now at the situation in aromatics, particularly in benzene. North America and Europe are awash with product. You can’t simply stop producing benzene. There was talk a while ago about customer inventories running down and producers tried to push prices up, but to no avail. Stockpiles have increased yet again as the (negative) message has come though loud and clear from polystyrene (PS) up.

The situation is much the same throughout the chemical industry in the US. In August some producers hoped they had seen the bottom of the cycle. Even at the European Petrochemical Association (EPCA) meeting at the beginning of October, it seemed there might be some respite soon from disastrous demand conditions. In terms of importance and influence, the high energy cost burden (in the US) had been overtaken by the much weaker demand growth scenario.

The US industry data, provided by the American Chemistry Council (ACC), show that although producer inventories have been dropping since March they still remain above the historical ratio to shipments (or sales). A lot of this has to do with the weak US international chemicals trade environment but increasingly it is dependent on the now widespread demand slowdown.

In August, industrial chemicals shipments (industrial chemicals includes petrochemicals) were battered as inventories built up along the supply chain. The weakness in petrochemicals and organic chemicals was such that shipments for the month fell by 14.5% compared with August 2000. Export demand was by no means a positive factor. US producers saw much lower feedstock costs in mid-summer and competitiveness improved but the collapse in West European naphtha prices offset some of that relief.

Involuntary inventory accumulation is a problem for petrochemical producers and in industrial chemicals generally in the US. Inventories in the chemicals supply chain are always difficult to gauge with anything approaching accuracy but the ACC admits that a ‘certain degree of inventory accumulation has occurred’. Some of this has been worked down – hence the gleam of optimism earlier this month – but excess inventories throughout the chain will have to be reduced before a prolonged production recovery can occur. Also, some chemical producers may have been seeing customers build inventory as a buffer against supply disruptions. This would create short-term gains in the industry but would in effect 'borrow’ output from future production.

By: Nigel Davis
+44 20 8652 3214

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