INSIGHT: Demand uncertainty clouds petchems outlook

25 September 2007 17:55  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Slower demand growth for chemicals coupled with rising feedstock and energy costs could accelerate the industry into the next downturn.

The message is loud and clear that oil above $80/bbl will have an impact on a sector that has done so much to lift efficiencies and cut costs – and one that has been hugely successful at pushing higher feedstock costs further down the chain with higher prices.

Plastics converters and the host of chemical industry customers one step closer to manufacturing have borne the brunt of costlier chemicals. The big question is for how much longer?

Chemicals players currently have to rely on strong demand pull to buoy prices so warnings of the fragility of continued demand growth have to be taken seriously.

As the price of oil hovers around $80/bbl and threatens to move higher, minds are concentrated on just how much more margins might be squeezed.

Polymer producers in Europe have had the best time of it in recent months  but are the most vulnerable to low cost imports and a downturn as Standard & Poor’s (S&P) said on Tuesday.

The credit ratings agency has Basell, INEOS, SABIC and SABIC Europe in its European ratings universe. It expects the least integrated polymers player, INEOS, to fare the best in the second half given higher recent polymer spreads.

Rising naphtha costs have helped olefins producers gain a marginal fourth-quarter ethylene increase.

Initial ethylene settlements were reported on 21 September at €945/tonne ($1,331/tonne) FD (free delivered) NWE (northwest Europe) for both the fourth-quarter and October-November bi-monthly contracts, up €20/tonne and €15/tonne respectively according to global market intelligence service ICIS pricing.

The increase was based on tightness in the European market and the recent sharp increase in upstream naphtha costs, which breached $700/tonne CIF (cost insurance, freight) NWE last week to hit a high not seen since May.

Both polyethylene (PE) and polypropylene (PP) prices appear to have peaked this quarter, however, and look set for a correction in the fourth quarter although higher priced oil and naphtha may have put a stop to that.

Many converters in Europe see September as the end of a bull run for PE that started in January. European PP producers are nervous amid talk of lower priced material being offered from the US.

Polymer supply in Europe has been tight this year and margins have held up but European prices are expected to come more in-line with Asia and North America where market fundamentals are not as strong.

Undoubtedly tight supply/demand balances are underpinning the sector in Europe but if the strength of demand growth begins to ease producers will face a stronger push back on prices.

The most difficult driver to call for the sector currently is demand growth but the on-going credit squeeze is expected to have some negative economic impact.

Couple somewhat slower downstream demand for petrochemicals and polymers with still higher feedstocks and energy costs and you have a recipe for a more difficult market environment.

That environment gets tough when new low cost capacities in the Middle East begin to make their presence felt.

By: Nigel Davis
+44 20 8652 3214

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