INSIGHT: Trying to read market direction

01 May 2009 14:54  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--Does a possible reduction in the pace at which demand is declining mean that petrochemical pricing will not suffer a sharp collapse from July this year?

It’s hard to say – in fact it’s impossible to really say right now, which is a major concern for producers.

Mathematically speaking, you would have thought that the retreat in pricing cannot be as bad as last year because prices are nowhere near their 2008 highs.

Ethylene, for example, which reached a 2008 high of $1,625/tonne FOB (free on board) SEA (Southeast Asia) on 11 July, suffered its first big period of correction to $1,040/tonne FOB SEA by 26 September.

It then fell to $420/tonne FOB by 12 December, according to ICIS pricing.

Prices have subsequently rallied to only $660/tonne FOB SEA on 24 April.

It’s the same for most petrochemicals and plastics.

High-density polyethylene (HDPE) film grade was, for instance, at $1,120/tonne CFR (cost and freight) China on 24 April compared with its high point last year of $1625/tonne.

What could happen, though, if crude tumbles towards $30/bbl because of panic by traders who have built historically high inventories because they think the economic recovery is just around the corner?

Swine flu is yet another threat to the recovery.

But petrochemical producers seem to have reacted sensibly to the collapse in demand.

Operating rates in Saudi Arabia - where the gas advantage means that great money can still be made - were “disciplined” in the first quarter, according to a Singapore-based trader.

US and European producers have made big cutbacks. LyondellBasell, Dow Chemical, BASF and others have idled numerous plants.

Japanese C2 operating rates were only around 75% in March, estimated Mitsubishi Chemical.

Logistics problems have limited the amount of product flowing from the US and Europe to Asia, added the same trader.

Some of the polyolefins that might have moved from the West to the East have remained where they are because a lack of container ships in the right place at the right time, he claimed.

Exports of finished goods from Asia to the US and the Americas have fallen dramatically since the global economy entered recession.

Ship owners are apparently also playing games to try and achieve barely reasonable returns in very weak gas and liquid chemicals markets, he said.

“You might book a vessel to, say, leave Rotterdam carrying benzene to Asia on the 5^th of May but the ship you need doesn’t show up until the 10^th because the owner has taken another extra shipment beforehand.”

Insurance premiums have gone up because of the increase in piracy off the coast of Somalia.

A ship owner might not be willing to take the risk of moving a low-level gas carrier making it easy to board) from the West to Asia, even if he can afford the premiums.

Cargoes are also taking longer to reach their destination as ships sometimes need to wait for 3-4 day in the Gulf of Aden in order to form convoys. This offers them better protection against pirates.

This is all positive stuff if you are a producer or buyer wanting a little stability.

But if you look at the trade data in isolation, an entirely different feeling begins to take hold.

Around 200,000 tonnes of US and European benzene is heading for Asia for March and April arrival, says consultancy DeWitt & Co.

China alone imported 114,000 tonnes of benzene in March. This compares with just 328,000 tonnes for the whole of 2008 – an average of 2,733 tonnes per month.

The surge in toluene shipments from the West to China is equally dramatic: China received 66,000 tonnes in January, 77,000 tonnes in February and 94,000 tonnes in March compared with a 2008 total of 273,000 tonnes.

China imported 33,000 tonnes of mixed xylenes (MX) in March – a 371% increase on the previous month but a 49% decline on the same month last year, according to China Customs.

China’s imports of certain grades of polypropylene (PP) rose by 379.9% in March over the same month last year.

These figures are perhaps only startling if you don’t have a clear view of global production levels (does anyone have such a view? If so, please let us know).

Have they gone up since prices began to rally in mid-February, have they remained unchanged – or might they have even gone down?

Some producers, and certainly the traders who of course love volatility, appear to have only intuitions as answers.

“The US has increased cracker operating rates, no question – and Europe did so a while ago,” said the trader.

But a source with a leading Western polyolefins producer argued: “I can’t see the logic of this as US and European producers are struggling to push through domestic price rises.”

The surge in West-East imports might be over as inventory pressures have been relieved.

It is too early to tell if this is right as all business for May arrival has been concluded with discussions for June delivery either only just beginning or yet to start.

Everybody agrees that it could be a big risk to fix shipments possibly for June arrival – and definitely for July – because of the end of the Asian turnaround season and new capacity in the Middle East and China.

Lower naphtha prices could also contribute to a price retreat – along with, of course, a collapse in crude.

What would happen to polyolefins, though, if there are more production problems at PetroRabigh – the Saudi Aramco/Sumitomo Chemical joint-venture project - which came on stream recently?

“If PetroRabigh had been on schedule then the increased supply would have stopped the price rally in April,” added the source with the Western producer.

The complex includes a 300,000 tonne/year high density PE (HDPE) line, a 250,000 tonne/year easy processing PE (EPPE) unit, a 700,000 tonne/year PP plant and a 350,000 tonne/year linear-low density PE (LLDPE) facility.

It gets even more confusing: some producers and traders talk of higher operating rates at Chinese and South Korean crackers since mid-February as a threat to markets.

Some of the scheduled second half start-ups in China might not happen. However, Fujian Refining & Petrochemical Co looks set to come on stream in July.

On the positive side again, though, much of the volume from three other big new Middle East cracker and derivative complexes might not hit the market until next year.

These are YanSab and Sharq in Saudi Arabia and Ras Laffan Olefins Co in Qatar – all of which had been due to be fully on stream in 2009.

PP capacity growth has also been slowed by several delays of propane-dehydrogenation-to-PP units in Saudi Arabia.

Reliance Industries’ refinery-linked 900,000 tonne/year PP plant is also substantially behind schedule.

If prices suddenly start to soften significantly, it is also quite possible that we will see more shutdowns in the West – perhaps some of them permanent as obsolete plants are scrapped.

On the other side of the debate, though, is talk from some traders (perhaps it is in their interests to say this?) of high polyolefin inventories among fellow traders and distributors in China.

But at least two producers say that stock levels are only at medium levels.

Switching back to aromatics again, though, toluene inventories are widely reported to be close to 100,000 tonnes in China against the usual 60,000 tonnes.

It’s hard work trying to read market direction – but maybe everyone is putting too much sweat and tears into this and over-complicating things.

Perhaps what’s needed is a focus on some good old-fashioned big-picture fundamentals.

These could apply to all commodities including crude oil, chemicals, iron ore, steel, aluminium and equities.

“I learnt long ago as a trader that it’s usually a mistake to ask someone why a market went up or down,” said Paul Hodges, chemicals consultant with the UK-based International eChem.

“JP Morgan, when asked about the outlook for the market, said very wisely that it would fluctuate.

“If a market wants to go up it will go up because there are more buyers than sellers and vice -versa. 

 “Commentators will then ascribe this to news of something or other, but that doesn’t imply cause and effect. 

“What is always interesting is to understand why people are buying or selling.

“I am pretty sure it’s the ‘seeing through-to- the-recovery’ argument, which makes people think they have to jump on the train before it leaves the station. “

So all you need is to make your mind about is whether the global economic recovery is really imminent.

That’s an easy task for the weekend.

To discuss issues facing the chemical industry go to ICIS connect

By: John Richardson
+65 6780 4359

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