INSIGHT: Rising oil prices challenge chemicals recovery

11 January 2010 17:19  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Data compiled by the American Chemistry Council (ACC) provide a detailed backdrop to the current uncertainty in the chemicals industry.

“There is a possibility that for some polymers, the recovery was so strong in the second half of the year that actual production for 2009 might even be up compared to 2008”, is perhaps the most surprising assertion from the council’s economics and statistics department in the introduction to its first weekly economic report of the decade.

The statement is based, however, on year-to-November 2009 production numbers for some polymers that are only marginally different from those for the same period in 2008.

The suggestion, then, is that if December was not a complete disaster, the second half of 2009 will not look at all bad.

The data underscore the fact that the recovery in chemicals from the low point continues.

The ACC’s economists suggest that recent economic indicators point to a further recovery of US industrial activity. That increase in activity is being translated into chemicals demand.

The gains in polymers output by the second half of 2009 indicate a stronger underpinning for the business; they also show that the now global upturn in manufacturing is feeding back into demand for basic chemicals.

The year 2008 was one of distinct halves: one of relative strength, the other of significant weakness. Chemical-industry output hit a low point around the end of 2008 and the beginning of 2009.

The upturn through 2009, however, has proved to be significant. Destocking is over, although inventories appear to be low through most product chains.

North American production of polypropylene (PP) was down only 0.6% in the year to the end of November 2009 compared with the same period in 2008, the ACC notes. Sales and captive use of the polymer were down just 1.4%.

Producer inventories for the month were down 14.9% year on year, but production was up 18.4% year on year at 1.41bn pounds (640,000 tonnes).

Production of the three types of polyethylene  high density (HDPE), linear low density (LLDPE) and low density (LDPE) was up 26.3% year on year at 3.15bn pounds, while inventories were down 165.3%.

Polypropylene, it should be remembered, is used in packaging, automotive parts and in appliances. Polyethylene goes into packaging, household goods, toys, wire and cable, and many other markets.

The polymer gains are reflecting increased demand from outside North America, largely from China, but also stronger domestic business.

However, emerging-market growth is expected to be the driving force in 2010. And that growth is driving commodity prices higher, putting further strain on the profitability of chemical companies.

The recent price uptick has seen oil almost double in value since this time last year.

WTI February futures were trading at $83.87/bbl on Monday, having risen on good economic data from China and the cold weather in the northern hemisphere. Twelve months ago, February WTI futures were trading at close to $38/bbl.

US natural gas prices have been pushed higher by the cold weather and are up more than 25% from last year. But, at 11.2:1, the ratio of oil to natural gas prices towards the end of last week was very favourable to US gas-based producers of olefins and other chemicals.

When the ratio is above 7:1, gas-based producers are favoured against their liquid-based counterparts.

Faced with still higher feedstock costs, however, petrochemicals and polymers producers are pushing up their prices. But those increases will only be held should demand growth be sustained at a relatively high level.

In his blog entry for ICIS on 10 January, Paul Hodges, chairman of consultancy International eChem, questioned whether GDP growth could be sustained with oil above $80/bbl.

High oil prices, he said, are in effect a tax on the general population and cause demand destruction. He asked whether industries such as chemicals can successfully pass through price increases to cover the higher costs and maintain previous growth levels.

Higher prices of commodities particularly put strain on those companies that principally operate in parts of the world where growth, which may be steady, remains relatively subdued.

Despite the evidence for the return to growth through 2009, clear questions over the robustness of the recovery remain.

The chemical operating data and the economic trends are encouraging. But the run-up in oil prices, and the upward march of gas prices in the US, put further strains on producers that are battling to recover margins and profitability.

Bookmark Paul Hodges’ Chemicals and the Economy blog
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By: Nigel Davis
+44 20 8652 3214

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