INSIGHT: Now slowing demand takes its toll

10 September 2008 17:09  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Petrochemical players may have some reasons to be cheerful this week, but they still view the future with caution.

Brent crude has passed the $100/bbl mark - moving in the right direction one might suppose. Naphtha is down and critical margins have improved.

Yet the rapid run-up in costs and speculation that oil could climb still higher - to $200/bbl some suggested - have continued to do much harm.

No wonder this industry dislikes more than anything volatility and speculation.

Wary of still higher prices, customers have lifted inventories masking the true impact of high oil and the economic downturn on chemicals demand.

The world may look a little brighter for a moment but the underlying slowdown continues to give cause for concern.

In late August the American Chemistry Council (ACC) published its latest data on chemicals production: detailing the trends for April through July. It made salutary reading.

True, globally chemicals output has continued to grow strongly, particularly when you take pharmaceuticals out of the equation.

The ACC global production index (excluding pharmaceuticals) was 9.5% higher in April and up 8.3% and 6.1% in May and June. These are year-on-year changes in a three-month moving average.

The absolute rates of growth are healthy to say the least but the numbers illustrate clearly the rate of the slowdown:   

Production volumes (% change year-on-year – three month moving average)	April 2008	May 2008	June 2008	July 2008
World total (Chemicals excl pharmaceuticals)	9.5	8.3	6.1
North America	-1.5	-1.9	-2.1	-2.2
Latin America	3.8	2.6	1.2
Western Europe	-0.6	-1.5	-1.6
Central & Eastern Europe	0.7	1.1	1.1
Africa & Middle East	7.1	7.4	9.3
Asia Pacific	5.6	5.0	4.5

Source: American Chemistry Council

That is most apparent in the US and Canada and in western Europe, where major chemical producing countries are registering lower output.

The short and medium term prospects for China’s chemicals demand growth are critical to the global business.

The Europeans will suffer as local demand comes off the boil and US firms will feel the pinch as the ability to export is put under greater pressure.

It is the demand side of the equation that should be of greatest concern now; costs and price having been in the foreground for so long.

International eChem chairman Paul Hodges makes the strong point in his latest blog for ICIS that the whole supply chain appears to be filled with product, bought on the basis of a consensus forecast of $200/bbl oil.

This surplus may well take weeks, if not months, to clear properly, he says.

So will we have to wait even longer to see the full impact of demand slowdown on chemicals?

Consumers in North America and Europe have cut back in the face of higher oil and energy costs and, latterly, to bear the brunt of higher food prices.

Leading indicators of global industrial production continue to suggest softening activity, the ACC says.

Now, the substantial reduction in oil and naphtha prices is the threat to chemicals volumes, a point made by ING in a just-released report to clients on chemicals volumes.

Destocking in basic chemicals is the "obvious purchaser response" to falling naphtha prices, the bank says, and its chemicals volumes proxy index continues to suggest that this is a feature in the third quarter.

But the credit crunch and the oil price run-up have sent waves through the world’s economies, the impacts of which have yet to be fully felt. Hodges worries that 2007/2008 seems very like 1979/1980 and his fears appear to be being borne out.

Petrochemicals producers need to concern themselves now with holding on to price in the face of slowing demand and weakening feedstock costs. Theirs will be a difficult job. The balance may work somewhat in their favour initially but, one might ask, for how long.

Product prices are heading downward in key markets – ethylene being a prime example – as it is becoming much more widely apparent that demand has truly come off the boil. 

A difficult 2008 looks likely to get worst in spite of lower priced oil in the second half.  

Bookmark Paul Hodges’ Chemicals and the Economy blog
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By: Nigel Davis
+44 20 8652 3214

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