13 February 2009 14:48 [Source: ICIS news]
By John Richardson
Demand has also recovered, though on modest restocking. Converters were holding several weeks of inventory in the first half of 2008, says a Hong Kong-based trader.
“This fell to as low as one day in Q4 but is now back up at one week. From naphtha through to resin, prices fell too far – an overreaction as everyone panicked. A recovery was inevitable but the question now is whether the recovery has been overcooked.”
Increased liquidity in
Approval processes for loans have been simplified and there are reports that recently beefed-up labour and environmental rules can be ignored.
“Some of the extra cash is flowing into fixed-asset investments, but a lot of it is also ending up in trade finance and with the traders who have bought petrochemical cargoes in the hope of making a killing,” said a Singapore-based trader.
“If it all goes pear-shaped and they have to liquidate their inventories at a loss, will they have to repay their loans? This is an interesting question, as this would counteract the boost that the extra lending has given to the economy. I suspect that the answer could, in some cases, be no.”
So there you have it: if any of the traders are aware that their lending has no strings attached, they can afford to take a risk-reduced punt.
But for producers of petrochemicals, the danger is, of course, that the not-always-entirely-visible quantities of traders’ inventory could suddenly flood the market and cause a downward price correction.
Producer sentiment has definitely improved relative to the fourth quarter of 2008, and there is no disputing that there has been a real and tangible improvement in demand from some end-users.
However, it doesn’t take a rocket scientist to note the vulnerability of some downstream sectors compared with others.
A lot of PE goes into packaging. Even in the midst of what is perhaps the worst economic crisis since the Great Depression people are not suddenly going to switch back to paper to wrap food.
But while PE’s price rally continued after the Lunar New Year, the phenol chain continued its decline as most of the consumer spending at the end of this chain is non-essential or discretionary.
For instance, why rush out and buy new CDs and DVDs if you might be about to lose your job? Some polycarbonate (PC) also goes into construction as does phenolic resins.
Upstream aromatics values have improved as a whole. Yet benzene is awful. It has traded at or below naphtha since November 2008, reflecting the need to run reformers for other reasons – and weakness in some benzene derivatives.
Five weeks ago, toluene was at $470-480/tonne FOB (free on board)
The rise in isomer-grade xylenes began earlier and has led to even healthier spreads over naphtha. Prices were at $690-710/tonne FOB
“We’ve seen, as a result, several toluene disproportionation (TDP) units (which take toluene and convert it into xylenes) restart in
But there are reports of Japanese TDP operators being a little more cautious.
The surge in isomer-grade values is obviously being driven by the polyester chain.
Paraxylene (PX) had risen to $890-910 FOB
But again, there you have it: Some polyester plants are reported to be running at only 50% of capacity in
The huge Chinese economic stimulus packages are going to help, but some commentators say that domestic polyester demand grew too quickly and was going to level off anyway – even without the economic crisis.
The blunt fact is that no matter what the government does to boost the economy, in the short term it cannot replace all the lost demand in the West for finished goods, from shirts to plastic toys to shoes and electronics.
With the consumer-demand outlook at the very least uncertain – and probably set to get even weaker – are we therefore in the midst of a mini petrochemical-pricing bubble?
Some support for aromatics will be offered by improving gasoline demand. There are already reports of a greater requirement for toluene and xylenes as octane boosters.
Asian gasoline demand is also set to continue growing, even if at lower rates.
The fate of poor old benzene, therefore (which you obviously have to always take out of reformate) might be grim. How far could it fall below naphtha prices as reformers keep operating for gasoline, xylenes and toluene values – and to produce hydrogen for hydrocrackers?
And what of the support from naphtha, which has, as was previously mentioned, been a big driver behind recent petrochemical price gains?
“I am bearish on naphtha in the second half of this year,” said N Ravivenkatesh, a Singapore-based consultant with international energy consultancy Purvin & Gertz.
“A reason is weaker petrochemical demand. For example, Northeast Asian naphtha demand (excluding
He sees the overall Asian deficit slipping to well below its 2008 level of 3m tonnes.
More than 5m tonnes/year of C2 capacity alone is due on stream in the
Naphtha, as with petrochemicals, had to rebound as prices had fallen too far.
Refiners were caught unawares by the fourth-quarter crisis and made big operating cutbacks, along with their petrochemical customers.
Crack spreads for gasoline, naphtha and other refinery products fell into deep negative territory in October-December, but have since rebounded very strongly, said Ravivenkatesh.
The improvement in naphtha is the result of the refinery rate cuts, better demand from petrochemicals and reduced exports from
Term naphtha requirements have been reduced by northeast Asian cracker operators because of the uncertain demand outlook. Spot premiums have, as a result, increased as the spot market has become more active.
And because of deep operating rate cuts at Chinese refineries,
“Now, though, the refinery and petrochemical players are trying to communicate better in order to better coordinate operating rates,” Ravivenkatesh said.
What of crude prices? They might firm a little on likely further OPEC cut backs next month, but you cannot see a big upsurge in pricing without obvious signs of a sustained global economic recovery.
Second-half March naphtha cargoes were at $464.50-$465.50/tonne CFR Japan, first-half April shipments were at $454-$455.50/tonne CFR Japan, with second-half April at $443.50-$445.50/tonne CFR Japan.
Take away the argument of rising or firm feedstock costs and petrochemical producers will have one less reason for maintaining price increases.
It’s all about the economy. But even when the world is eventually sure that the worst is over, the petrochemical industry will still have to confront its big supply overhang.
We could see several more mini-pricing bubbles before the industry is out of the woods.
At least, though, there will be some people making money out of entering and exiting these bubbles at the right time.Read Paul Hodges’ Chemicals and the Economy Blog
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