FocusRecession fears grip Asian petrochemicals

15 October 2008 07:12  [Source: ICIS news]

By Bohan Loh

 

SINGAPORE (ICIS news)--Asia’s petrochemical industry could find little comfort in credit measures being implemented in the region, as it was uncertain whether demand could support prices as the global economy dangerously teeters into recession, analysts and markets players said on Wednesday.

                          

Although the region’s financial system is in better shape than its Western counterparts, the resulting credit crunch from the financial turmoil has been taking its toll on overall economic activities.

 

Japan has introduced a US dollar funding facility that its financial institutions can tap while Hong Kong has announced plans to guarantee deposits to encourage banks to lend again, following similar moves in the US and Europe to restore confidence back in the banking system.

 

“The kind of measures undertaken in Asia is to complement what has been done elsewhere. It will be more a case of alleviating the situation instead of solving the problems,” said Vishnu Varathan, economist at consultancy firm Forecast.

 

“We don’t think we could sidestep a slowdown. Lending may not be as jarring now as governments pump in liquidity into the system, but economies may not bounce off a trough sooner,” Varathan said.

 

The massive bank bailouts, the coordinated interest rate cuts and recent efforts to ease the liquidity squeeze may no longer be able to avert a recession, economists said.

 

Market stability would be elusive for a while and may keep trade in petrochemicals at a minimum, market sources said.

 

“You cannot find stability in an environment where growth trends, if any, and the extent of the slowdown are uncertain or unknown,” said Song Seng Woon, regional economist with CIMB-GK.

 

“The banking crisis has now been replaced by recessionary concerns,” he added.

Asian polymer players have pointed to volatility in crude prices coupled with an acute bearish sentiment within the regional markets as the primary reason underlying a pronounced refusal to engage in trade.

 

“These bail-out packages do not mean anything unless they translate into an increase in demand in the US, which is a key export market for my product – polypropylene ('PP) raffia bags,” said an Indian PP converter.

 

“Buyers are estimating a workable price based on current feedstock costs. But the problem is that the costs of these raw materials have fallen 20-30% since we’ve bought them,” said a northeast Asian adipic acid producer explaining the widespread disparate buy-sell ideas.

 

Other industry players were caught in a price dilemma.

 

“The problem is if we hold our prices, no one will buy. If we drop our prices, people will think that prices will go down further,” said a SE Asian melamine producer.

 

“So not many people are ready to buy and their sufficient inventory levels for the moment are not helping either,” he added.

 

The Asian benzene market was not spared the confusion over price levels following a $175/tonne week-on-week to two-year lows last week that resulted in few discussion engagements and trades this week within the traditionally liquid sector.

 

Most market watchers have conceded to an inevitable slowdown in demand..

 

“We won’t be having it good for the next 2-3 years,” said Pongpan Apinyakul, an analyst with brokerage firm, Kim Eng Securities.

 

“What we are seeing now is just the tip of the iceberg,” a key eastern China-based acetic acid producer said in Mandarin, adding that the long term outlook remains negative.

 

For more on petrochemicals s visit ICIS chemical intelligence  

To discuss issues facing the chemical industry go to ICIS connect 

 

Pearl Bantillo, Yu Guo, Leon Toh, Prema Viswanathan, Mahua Chakravarty and Helen Lee have contributed to this article.

By: Bohan Loh
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