09 October 2009 16:37 [Source: ICIS news]
By John Richardson
But even the most bullish of chemicals traders have been consistently putting this recovery into worrying context.
"I have done reasonable business this year and made quite good returns, but volumes are way down," said one trader, who deals in toluene and mixed xylenes (MX).
"Cracker-based aromatics producers are being exceptionally cautious and are very unwilling to risk building inventory.
"Whereas I used to get, say, 5,000 tonnes a month from a particular company it's a maximum of 2,000-3,000 tonnes and sometimes none at all."
"The end-user demand is simply not there. All we've really seen is some re-stocking, the cost-push from higher crude and a lot of speculation by Chinese traders.”
“We have to wait for end-November when pricing should pick up. Manufacturing usually increases ahead of the next Chinese New Year (February 2010).
"If it doesn't this is a sign of some big supply imbalances."
But even if there was a brief rally at the end of November, he predicted that afterwards there would be a prolonged trough on new capacities and a fall in Chinese bank lending.
These views are being expressed at a time when a long bull-run in operating rates is coming to an end.
Asian naphtha cracker operators have started cutting production in October after five months of high output, ICIS news reported earlier this week.
Some 50,000-60,000 tonnes of spot ethylene are due to be loaded this month at a time of weak
Cracker rate cuts are in response to a 64.5% ($109/tonne) drop in Northeast Asian (NEA) ethylene margins, with high-density PE ((HDPE) margins down by 23.8% ($93/tonne) at the start of the fourth quarter. This is according to data from the ICIS weekly Asian ethylene and PE margin reports.
It’s becoming increasingly difficult to make a convincing case for better news in the fourth quarter because of broad-based overstocking in
It is not just the well-documented huge increase in bank loans that could have overheated
Government subsidies/loans for imported raw material purchases might have been used to keep factories running and minimise unemployment.
Commodity stockpiling may also have also taken place as a hedge against a weaker US dollar.
And export tax rebates have been increased from 11% to 16% for many products.
False confidence might have been created by what several sources have said were low chemical and polymer stock levels in bonded warehouses until at least July-August - the likely result of extra incentives to import raw materials and manufacture finished goods.
But there are reports of high levels of intermediate and finished goods inventories, resulting in sharp cuts in operating rates in some manufacturing sectors.
This has been the case in the textiles chain, contributing to recent falls in pricing – as reported by ICIS pricing - all the way up the chain to aromatics.
The debate now is whether export-focused manufacturers have over-produced for the Christmas season in the West.
Year-on-year sales of finished goods to retailers in October-November will surely look good after the disastrous same two months in 2008. The real measure should be against October-November 2007.
Take the seven to eight straight months of increased chemical and polymer imports by
Low-density polyethylene (LDPE) imports increased by 96% to 690,000 tonnes for the 12 months up until June this year, according to New York State-based International Trader Publications (ITP) Inc.
But still, total global trade in the polymer declined by 3% to 8.2m tonnes for the same period, added ITP - a provider of trade data and analysis on chemicals and polymers.
Other official government statements have made it clear, though, that less bank lending will be available for speculative purposes.
Perhaps this is a factor behind the 63% drop in September volumes on the Dalian Commodity Exchange’s linear-low density PE (LLDPE) futures contract as against April - the peak month so far this year. Pricing has also fallen.
“This is a sign of weak overall sentiment. Traders have suffered heavy losses and so they have less cash to spend in the physical markets,” added the Singapore-based polyolefins trader.
And macro-economic data continue to suggest deep-seated with Western demand.
So the next time you bump into a chief executive officer or some other senior official from a chemicals company, it might be worth asking the following questions:
1. “How much of your improvements over the last few months has been the result of cost-cutting and restocking?”
2. “When both come to an end (and this may well have already happened for re-stocking) how confident are you on a scale of 1-10 that you'll be able to continue delivering quarter-on-quarter improvements in your financial performance in 2010-11? In other words, can you grow volumes and increase profitability.”
The answers could be telling.
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