26 October 2010 17:26 [Source: ICIS news]
By John Richardson
Two analysts’ reports - one by Morgan Stanley and the other by Merrill Lynch - add statistical weight to the growing belief that a period of excellent petrochemical and polymer profitability is just around the corner. The Morgan Stanley report even carries the title “Preparing for a Supercycle.”
The danger might be, as has happened so many times before, that companies pile into new capacity on forecasts like these, thus fulfilling a time-honoured tradition of driving markets into oversupply.
But any projects announced over the coming few quarters will struggle to be on-stream in time to prevent the fly-up in operating rates predicted by Morgan Stanley for 2012 and 2013.
And as the bank also points out, it does seem as if we have reached an inflexion point in the global plastics market, driven by
But this assumes you buy the argument that growth in the emerging world can remain at recent high levels, even if finished-goods exports to developed countries decline due to the West’s deep-seated economic problems.
Morgan Stanley accepts that its view - “that we are entering the strongest period of sustained petrochemicals demand growth seen in the past 20 years” - is far from being the consensus.
Nevertheless, as we said, momentum for this type of outlook is building following a year when margins have refused to collapse in the way that they were supposed to.
Several senior petrochemical industry sources also point out that they have been predicting an imminent boom for a lot longer than many industry observers.
“We’ve been forecasting this for a year now,” said the head of petrochemicals and polymers with a leading Asian producer.
The arguments being made by Morgan Stanley might sound familiar, but it is the numbers behind its opinions that are fascinating.
Gas shortages in the
“The global credit crisis has (also) squeezed finances at most petrochemical producers, limiting expansions. On our estimates, supply growth is set to average just 2.8% in 2011-2014,” the report continues.
This will compare with a worst-case scenario of a 4% compound average growth rate (CAGR) in global ethylene demand in 2009-2014 with the bank assessing base-case growth between these same years at 5.6%.
Its “bull” scenario is for demand to expand at a CAGR of 7.8%.
The growth pessimists are being misled by history as between 2000 and 2009, emerging market growth failed to compensate for a fall in polyethylene (PE) demand in the developed world, the bank argues.
While European demand grew steadily between 2000-2007, all the gains were lost during the economic crisis.
Thus global ethylene demand growth fell from 1.9 times global GDP growth in 1990-2000 to 0.9 times GDP in 2000-2009 - and it is this lower number that Morgan Stanley says is informing the more negative forecasts.
And so Morgan Stanley is forecasting that global utilisation rates bottomed out at 84% in 2009 and will rise to 88% in 2012 and 92% in 2014.
“Our industry macro view is for modest improvement in 2011-2012 and a potentially ‘sold-out’ condition in 2013,” writes Merrill Lynch in its report.
It attributes the coming boom to the continued strength in Chinese demand and improved supply-side pricing discipline.
Lack of new capacity announcements in the Middle East has also coincided a fall in US natural gas prices - resulting in Dow Chemical and LyondellBasell being among the companies favoured by both banks. How times change!
Not surprisingly, Merrill Lynch has upgraded earnings per share (EPS) forecasts for several of the chemical companies it tracks.
For instance, its EPS estimate for
It is easy to be sceptical as forecasting is a perilously difficult activity, and to quote Donald Rumsfeld, what we have to worry about are the “unknown unknowns”.
Two such recent examples include unexpectedly strong demand growth in
Who can safely predict that the next game-changer will not be a big negative rather than a positive for the petrochemicals industry?
For example, what about a sudden increase in environmentalism in Asia that leads to plastic-bag bans on the scale we have seen in the
But the forecasts point to a huge risk of career-damaging missed opportunities - hence, watch out for the herd changing route.
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