InterviewRising crude may squeeze Asia petchem margins - S&P

14 December 2010 04:45  [Source: ICIS news]

By Pearl Bantillo

Strong crude prices could squeeze petrochemical marginsSINGAPORE (ICIS)--Strong supply amid continued weakness in demand may keep petrochemical prices soft in Asia next year, with producers’ margins likely to be squeezed by higher oil prices, an industry analyst said on Tuesday.

“The prospect of rising oil prices, with the supply overhang - it’s going to squeeze market next year,” Standard and Poor’s corporate and infrastructure ratings analyst Andrew Wong told ICIS.

Oil prices were hovering close to $90/bbl (€68/bbl), largely on account of the US dollar weakness that makes investments in dollar-denominated commodities more attractive. At noon, light sweet crude for January delivery was trading at $88.47/bbl, up by more than 8% from the start of the year.

Among petrochemical products, ethylene gained 2.2% in value in northeast Asia from the start of the year, while toluene was up 1.1% while benzene fell 5.72% over the same period, according to ICIS data.

“The improvement in demand is going to be quite important to support product prices. Otherwise, oil prices are creeping up ... increasing at a pace faster than product prices,” he said.

Ethylene capacity additions in Asia this year would be about 7m tonnes, based on earlier projections from Chemical Market Associates, Inc (CMAI).

But demand has remained lacklustre as economic recovery had been, at best, tentative in the western economies. Debt problems in the eurozone, along with the continued fragility in the US economy, were weighing on overall demand.

“A lot of petrochemical companies have been very thankful that China is there to support demand,” said Wong.

“But I think they also realise that you can’t keep on telling investors or lenders that China is always going to be there. They are trying to make sure there is sustainable demand in their domestic markets as well,” he said.

Given current market fundamentals, product prices may be a couple of years away from hitting pre-crisis levels, the S&P analyst said.

“There’s going to be a fairly gradual improvement in the economics of the industry,” Wong said, adding that petrochemical companies may have to perform a “delicate balancing act” should crude prices continue to spike.

“For some existing players, it might be good for a while - it [higher oil prices] might get product prices high once demand is coming back,” Wong said.

“But there’s going to be a point when all these new capacities are going to … start producing and then that’s going to put a cap on product prices,” he said.

S&P categorises the chemical, commodity and specialty chemical industries as "slightly higher risk" given their cyclical and capital-intensive nature, as well as due to volatility in product prices, said Wong.

Meanwhile, a positive spin to the recently strong capacity additions was that capital expenditures would be less in the coming year, Wong said.

Companies would be more focused on trying to mitigate the “challenging operating environment” and not overspend, he said.

($1 = €0.76)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections
To discuss issues facing the chemical industry go to ICIS connect


By: Pearl Bantillo
+65 6780 4359



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