13 May 2011 16:27 [Source: ICIS news]
By Nigel Davis
LONDON (ICIS)--Commodity and financial markets are losing value as the reality of China’s credit crunch becomes more widely appreciated. And while mainstream chemicals markets in large parts of the world continue to push against record highs, the future direction of prices is far from certain.
There is no room for complacency in such a volatile commodities, chemicals and financial environment, so the gung-ho attitude of some western players following the particularly strong first quarter is surprising.
True, the money is in the bank for almost the first five months of 2011, so the rest of the year could be a breeze. And this is perhaps not the time to be seen to flinch in the face of investors. But they understand better than anyone that markets turn – the financial markets have been jittery all week and chemicals stocks have suffered as a result.
Chemicals players are perceived – rightly or otherwise – to operate largely in cyclical markets that are driven by macroeconomics but hidebound by production capacity. Tight supply and low inventories have kept the ball aloft for such a long time now, an increasing number of market participants are asking when the game will end.
Sooner than some might think is a view gaining much wider currency.
Crude oil dropped 5% at one point on Thursday in volatile trading, although prices recovered on Friday morning. The NYMEX suspended fuel, heating oil and crude oil trading for five minutes after gasoline futures slumped.
A week ago commodities, led by silver, dived as investors worried about the recovery in the US and in Europe and whether the commodities bubble was about to burst.
China is not sucking in the same volume of raw materials as it did a year ago, although values are up. Analysts are talking about demand destruction.
“We are seeing evidence that commodity prices are unsustainably high and the next big move will be down,” Julian Jessop, chief international economist at researchers Capital Economics, was reported as saying in the UK’s The Guardian newspaper on Wednesday.
“The major commodities, such as wheat, sugar or copper, will be down between 10% and 30% by the end of the year,” he added.
One voice among many, perhaps, but Jessop’s views encapsulate current market nervousness that is reflected in chemicals.
Naphtha is down in Asia but tight supply is underpinning prices. Naphtha prices dropped by more than 3% in Europe on Thursday on lower crude and a slump in gasoline prices.
High commodity prices are squeezing markets and crimping demand. Hour-to-hour, let alone day-to-day, price volatility is on the rise.
In China, inflation and tighter credit have overshadowed chemicals markets for months. Pre-buying was a feature of the polymers markets before the Lunar New Year. The knock-on effect is being seen in the Middle East as producer inventories rise back to levels not seen since before the financial crisis.
Polymer inventory levels across Saudi Arabia are rising, one market participant suggested this week, because of weak demand from China. Prices are expected to fall as a result, according to a posting on the ?xml:namespace>
The head of BASF’s petrochemicals business in Asia, Torsten Penkuhn, put the situation into perspective in an interview with
“We feel that underlying GDP growth in China is around 9%, with chemical industry growth perhaps into double digits,” he said. “But if you look at first-quarter results, you see 15–20% sales growth.
“So there is an underlying speculative element which comes from an anticipation of shorter availability of credit. There has been some pre-production by people worried about their credit lines being withdrawn.”
The growth in China’s imports was crimped last month by higher commodity prices, and the country’s trade surplus widened markedly. Raw material import volumes were down.
The demand growth slowdown and crude volatility hit chemical players hard. Higher crude prices are being sustained by geopolitical uncertainty as well as rampant speculation. BASF said last week that it had raised its expectation for the crude price in 2011 from $90/bbl to $100/bbl because of the situation in Libya.
ExxonMobil CEO Rex Tillerson told Congress on Thursday that based on supply/demand fundamentals, the oil price should be between $60/bbl and $70/bbl.
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