INSIGHT: Getting ahead of yourself

08 September 2009 16:59  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--Call a downturn long enough and eventually you’ll be right.

So, do the recent declines in aromatics and fibre intermediates pricing herald a wider and longer-term correction?

“Benzene is pretty much a barometer for the chemicals industry because of its wide range of uses,” says Paul Hodges, UK-based consultancy with International e-Chem.

“It led the recovery last time and so it could well lead the downturn on this occasion.”

This slide, from ICIS pricing, shows how benzene rose before ethylene when the recovery began earlier this year:

Benzene rose before ethylene

Benzene has been bearish for the past few weeks, falling to $785-790/tonne FOB (free on board) Korea for the week ending 4 September, according to ICIS pricing.

This compared with $905/915/tonne FOB Korea a month earlier.

However, ethylene was more or less unchanged from four weeks earlier at $990-1030/tonne FOB Korea.

But ominously, perhaps, high-density polyethylene (HDPE) film-grade pricing had slipped by as much as $40/tonne – the first decline since May.

Just as benzene began to slip some time ago, so did some of its major derivatives/sister products.

Styrene began to fall from the end of July.

Mixed xylenes (MX), paraxylene (PX) and purified terephthalic acid (PTA) are on a bad run stretching back a month.

“We might be out of a global recession, meaning things have stopped getting worse. But we have yet to see any real growth,” is Leonard DeGuzman’s overall view.

As far the aromatics chains are concerned, the DeWitt consultant believes that the “industry might have got slightly ahead of itself” in believing that the recovery had definitely arrived.

Stock-building by end-users took place in August all the way down the fibre intermediates chain from benzene to synthetic fibres.

“The good news is that overall inventory levels in China are not too high. Toluene, for instance, is at 69,000 tonnes which is high-to-balanced and MX (mixed xylenes) at 50,000 tonnes - balanced.”

“The bad news is that inventory-holding has shifted towards these end-users, meaning they have no need to buy as much in September.”

Whether they have overbought won’t become clear until after the long Chinese holidays to mark the 60th anniversary of the Revolution. These take place from 1-8 October.

Until then all markets are likely to remain pretty quiet.

But in DeGuzman’s view there’s already evidence that European styrenics producers might have got ahead of themselves in producing for a recovery that hasn’t happened.

US exports of styrene have recently become unworkable on poor netbacks, but it’s not clear at this stage whether European stocks are high.

This is putting pressure on benzene in Asia. South Korea is only likely to be able to export 40-50,000 tonnes to the States in September (the US imports Asian benzene to make into styrene for re-export).

This compares with 80,000-85,000 tonnes in August and monthly shipments averaging around 50,000 tonnes in 2008. (Last year is more representative because 2009 average exports will be skewed by lack of demand in the first and second quarters).

Not surprisingly, DeGuzman predicts that Asian toluene disproportionation (TDP) and hydro dealkylation (HDA) units will soon see rate cuts.

Toluene was at $755-760/tonne FOB Korea on 4 September and if you recall benzene was assessed at $785-795/tonne FOB Korea. In other words feedstock costs were close to finished-product prices.

It’s too early to say whether reformers will also be cut back.

Overall economics for benzene, toluene and xylenes (BTX) production still look good, according to this second slide from ICIS pricing:

BTX economics still look good

Average spreads for BTX are still above $150-180/tonne, the target range for producers. Spreads look even better when paraxylene is taken into account.

“Traders are equally divided between the optimists and the pessimists,” DeGuzman added.

The heart of the matter is the fibre intermediates chain where some of the biggest gambles might have been taken.

Reformer operators had recently been able to compensate for weak toluene and benzene returns through the strength of MX, said DeGuzman.

But MX had fallen by $60/tonne to $765-790/tonne by 4 September. As we had mentioned earlier, this was significantly down from a month earlier when prices were at $835-867/tonne FOB Korea.

Paraxylene (PX) fell by $90/tonne and PTA by $60/tonne, continuing downtrends that also stretch back into early August.

Synthetic fibre producers in China took the risk of raising operating rates in July and early August on predictions of stronger exports of textiles and garments to the West.

“We have yet to see any increase in exports and so rates have since been cut,” said DeGuzman.

China’s cotton prices are expected to fall in October after this month’s harvest, exerting even more pressure on the synthetic fibre makers.

And the danger is that exports of textiles and garments to the West might get worse rather than better because of a disappointing US “back-to-school” buying season.

Parents are cutting back on clothing expenditure for their kids and are instead prioritising paper, crayon and consumer electronics purchases, according to several retail-industry consultants’ surveys.

Overall back-to-school spending is expected to be several percentage points down compared with 2008.

This would be a bad start to the overall holiday sales season - so crucial for Asian manufacturers - which also includes Thanksgiving and Christmas.

“US stores where sales are really being hammered are the likes of JC Penney, Macy’s and Abercrombie & Fitch – the middle of the market where most of the profits are,” said DeGuzman.

Sales at Wal-Mart and Aéropostale, a discount children’s clothing store, have been growing.

Margins for low-priced retailers such as Wal-Mart hinge on keeping input costs down.

“This could mean even more pressure on costs all the way up the supply chains, even to MX-PX,” DeGuzman added.

The wider issue is whether a weak back-to-school season in the States is another example of deep and long term changes in Western consumer-spending habits.

Have the equity and commodity markets priced in a recovery that has no firm foundations?

This is the danger facing the whole of the chemicals industry as it looks into 2010.

Visit ICIS chemical intelligence for more on aromatics
Read Paul Hodges' Chemicals & the Economy blog
To discuss issues facing the chemical industry go to ICIS connect

By: John Richardson
+65 6780 4359

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