23 January 2009 16:33 [Source: ICIS news]
By John Richardson
But, as Charles R Morris writes in his book The Trillion Dollar Meltdown: “For shares to truly behave like gas molecules, trading would have to be costless, instantaneous and continuous. Instead it is lumpy, expensive and intermittent. Trading is also driven by human choices that make no sense in terms that models understand.”
There also appears to be no way of modelling and therefore predicting how chemicals markets will behave during the rest of this year, if they were ever really that predictable.
The problem now is that making any kind of forecast with any degree of confidence is nigh-on impossible because we are in a down cycle unlike any experienced before.
There are so many factors involved, including sharp currency fluctuations, credit problems and the simultaneous bursting of commodity pricing bubbles. This makes guesswork just about as reliable as any spreadsheet.
Take your pick on crude. Forecasts range between prices falling to below $20/bbl while others believe we could see a rally to above $50/bbl.
Extraordinary events are happening so frequently that yet another strange occurrence can seem almost mundane.
Who would have imagined 12 months ago that naphtha would have traded since October 2008 at close to or below the price of benzene?
The same happened in 2001, but now, with all the extra benzene due on stream, it’s hard to be convinced that pricing will recover.
Some 520,000 tonne/year of benzene produced as a by-product of steel production is rumoured to be about to come on stream in
This is into a market where
Benzene is still being produced in quantities that don’t make sense on a standalone basis in
Naphtha was trading at $441.00-444.000/tonne CFR (cost and freight)
Benzene was at $360-370/tonne FOB (free on board)
MX was more than $100/tonne lower five weeks ago. The recovery is the result of tighter supply, and perhaps better demand, down the chain to polyester.
A very rough estimate of conversion costs between naphtha and BTX produced via a reformer is $170-80/tonne and so on this basis MX is profitable, toluene is grim and as far as benzene goes, you are giving it away.
If the polyester chain were to weaken, integrated refiners and aromatics players could face the dilemma of what to do with their aromatics as they continue to operate in order to supply fuel-product markets.
Polyolefin markets are also behaving in a very strange fashion.
Who would have imagined a year ago that, in the second half of 2008, US refinery-based propylene prices would have fallen to fuel value? This resulted in it being burned as fuel and blended into gasoline rather than made into polypropylene (PP).
“I am absolutely convinced we’ve reached the bottom. In fact, markets began stabilising in mid-November,” said an Asian polyolefin producer.
“I really wish one of our plants wasn’t on a turnaround because we could have sold a lot more in January. We have sold out until February.”
If you only take into account one argument - that 80-90% of global polyolefin production goes into non-durable consumer goods – buyers should return in big numbers, resulting in a sustained pricing recovery.
“People still have to eat. Although random co-polymer PP grades are in a terrible state, homopolymer is OK,” said an Asian PP player.
A pricing recovery has taken place in recent weeks on the back of production cutbacks and a modest recovery in demand.
High-density polyethylene (HDPE) film grade was assessed at $900-930/tonne CFR main port
Four weeks earlier, film grade was at $820-870/tonne CFR main port
It’s the same story with PP. Raffia grade producer offers at $820-830/tonne CFR China this week. In late December, prices were at $780-800/tonne CFR China.
“But the problem is we are in a holiday spirit ahead of the Chinese New Year [Lunar New Year, 26 January]. Once that’s over it's going to get worse and consumer spending will go down,” said a Singapore taxi driver. His construction business recently went bust, which is why he is driving a taxi.
Many export-based factories in
Even those who restart are expected to take a four week break rather than the traditional 1-2 weeks.
And just as everyone remained very bullish in the first half of last year, the mood has reversed to one of deep pessimism.
Buyers are keeping resin purchases to a minimum because they are short of credit, have no clear idea about where the economy is going and don’t want to repeat the inventory losses of last year.
They are also well aware of a lot more new capacity due on stream in the
Lack of a clear direction on oil pricing doesn’t help, either.
But buyers would not necessarily rush back into the market in big numbers to pre-buy ahead of further price rises if crude went on a sustained bull run.
The rise in oil prices would have to occur at the same time as easier credit conditions and much better economic news for this to happen.
“I can see prices bumping along close to current levels for several more quarters, and possibly well into 2010,” said a senior executive with a global polyolefins major.
And he warned that pricing could suffer sudden sharp corrections - possibly by a hundred dollars or more at a time - because of the need to keep integrated complexes operating.
Just as people don’t behave like gas molecules, gas, liquid and solid molecules are valued very differently by different companies – whether they are in the aromatics or olefins chains.
“We have seen cases where integrated producers have sold resin at very competitive prices so they could relieve inventory pressure. On a standalone basis these sales lost money,” he added.
For the petrochemicals-only players such fire sales can have a very harmful effect, especially if they are highly leveraged.
“This has, of course, always happened. The problem now, though, is it that it’s devilishly difficult to estimate what your production rates should be. My worry is that this could mean sales like this are quite frequent,” the executive added.
But as forecasting is perhaps harder than ever, one possibility cannot be discounted: a sudden, rapid economic recovery as consumer and business confidence bounces back and as credit conditions continue to get better after recent improvements.
That’s a thought worth holding on to, even if only for the sake of making the New Year a little more festive.
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