INSIGHT: Signs of stagflation appear in US chemical markets

06 August 2009 17:40  [Source: ICIS news]

By Al Greenwood

Signs of stagflation appearHOUSTON (ICIS news)--Higher feedstock costs and weak demand are eroding margins for a growing number of US chemicals, and producers see no indications that markets will improve this year. 

Many US products are showing signs of stagflation, when companies lack pricing power to pass through higher costs. Margins have become so distressed, one producer has threatened more plant shutdowns if it cannot pass through costs.

Rising feedstock costs were the main factor behind a 6/cent/lb ($132/tonne, €91/tonne) proposal for August US polystyrene (PS). PS buyers intended to fight the increase since downstream demand was so weak.

However, producers have successfully pushed through increases during the past few months.

Likewise, a shortage of crude C4 led to a 15 cent/lb increase in August US butadiene (BD). However, BD consumption has been hit hard by the slowdown in US the economy, and buyers fear the increase could destroy demand.

The BD run-up, in turn, threatens downstream margins for US producers of styrene butadiene rubber (SBR). They are attempting to pass through costs when demand for tyres is poor.

Automobiles, construction and other key US markets remain weak, eroding pricing power at a time when costs continue to increase.

West Texas Intermediate crude oil rose from $33.98/bbl on 12 February to $71.97/bbl on Wednesday. Crude oil prices rose while the US economy shrank during the first half of the year.

"It's a very difficult environment," said Andrew Swanson, vice president, chemicals - Americas and Asia, for the US consultancy Nexant.

"Within the US market, there are very few segments where you can say demand is growing," Swanson said. "You look at the decline in demand over the last 12 months, and it's phenomenal."

Despite the squeezed margins, the current market environment does not resemble the stagflation of the 1970s, said Roger Shamel, president of Consulting Resources.

During that time, the increase in feedstock costs was larger and lasted longer, he said.

Nonetheless, high costs and weak demand are still squeezing margins. Indeed, some producers may act on their threats and shut down plants if they cannot pass through costs.

"It's a real threat that people have to take seriously," Shamel said. "It's going to be tough for the balance of the year."

Several executives have warned that demand could remain weak for the remaider of 2009.

David Weidman, CEO of US acetyls giant Celanese, expects little improvement in the world economy.

Dow Chemical expects that any rebound in the US and Europe will be slow due to high unemployment.

Kurt Bock, BASF Group chief financial officer, said the second half of the year could actually worsen.

For now, high cost and weak demand have manifested themselves through extended product negotiations.

Quarterly methyl methacrylate (MMA) prices have been settling in a wide 20-cent/lb range. In some cases, buyers are more keen to take on feedstock surges since they need product.

"Feedstock acetone moved up so we will take a percentage of that rise," said a buyer from the adhesives sector. "We need MMA. We can't risk losing volume because the producers can no longer afford to make the product."

At the other extreme, a buyer from the paint sector has withheld purchases.

"I really don't care what the product settles at since we are not buying anything right now," he said. "Our demand is at all-time lows, and I don't foresee any improvement this year."

(Additional reporting by David Barry, Heather McGuire Doyle William Lemos and Gene Lockard)

($1 = €0.69)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy
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By: Al Greenwood
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