INSIGHT: A mini-crisis? We’ll know in a few weeks

10 June 2011 17:10  [Source: ICIS news]

By John Richardson

PERTH, Australia (ICIS)--The next few weeks should answer the question of whether the fall in global petrochemical prices is a short-term setback or something much more fundamental.

Across-the-board, from olefins through to polyolefins, aromatics, styrenics and fibre intermediates, the buoyant mood of only a few weeks ago has been replaced by deep concern.

The inventory run-down process started three or four months ago in China, according to several polyolefin industry sources

China has historically only run on stocks for 3-4 months before it has had to come back into markets to re-stock, said the sources. This means that by mid or end-June we should see a recovery in demand, they added.

“The benefit could be that the longer China stays out of imports the bigger the pent-up demand and therefore the bigger the recovery in prices,” said an industry observer.

But where is this “pent-up demand” going to come from? Evidence continues to emerge of how demand, far from being pent-up in China, is being damaged by further restrictions on credit as the government tries to deal with inflation.

"Since early April domestic banks have cut the amount of credit that can be obtained in foreign currencies," said a Singapore-based polyolefins trader.

"As a result, you now have to open a few letters of credit (LC) to buy a cargo compared with only one LC previously. This is slowing and reducing trade."

Greater volatility in pricing, along with the tighter credit conditions, is also said to have led to much-reduced speculation across all chemicals and polymers.

It was the willingness to speculate that is said to have greatly boosted demand in China from the second half of 2009 and throughout last year.

A further problem facing the industry is this week’s failure by OPEC to agree on an increase in oil-production quotas. Crude prices have increased in response, making the job of containing inflation in China and elsewhere even harder.

This week’s rise in oil prices might lead to some more buying activity among chemical and polymer producers, along with higher offer prices from producers.

But the increases will not change underlying concerns about more-fragile economic growth. Crude could easily correct downwards again, leaving chemicals buyers sitting on high-priced inventory.

There is potentially some further bad news.

Although OPEC failed to agree on a quota increase, a media report says that Saudi Arabia has already unilaterally raised output to between 9.5m and 9.7m barrels a day in June. This would be 500,000 barrels a day more than in May.

Saudi Arabia raised its output because of concerns over the damaging effect that high oil prices were having on economic growth, the report adds.

Crackers in Saudi Arabia ran at average operating rates of around 85% for much of last year and into the early part of 2011 because oil production was pegged at around 8.5m bbl/day, according to a Middle East-based industry observer.

The country’s oil production needs to be approximately 10m bbl/day for enough associated gas feedstock to be available for the crackers to run at flat out, industry observers say.

“Around 1m tonne/year of ethylene production (most of which would have been turned into derivatives) has been lost because the crackers have been only running at 85%,” said the Middle East observer.

“I haven’t seen any evidence of higher oil production leading to more petrochemicals output, but the data tends to lag what’s happening by about a month. We should therefore know fairly soon.”

The China market seems just too weak at the moment to take any extra volumes.

It might not seem logical that Saudi Arabia should raise output simply because it has more associated gas available to run harder.

But traditionally, crackers in the Middle East have always run flat out if they have had the required feedstock, regardless of market conditions. The reason is that they can always make money no matter how bad things are.

“Middle East producers, even without any output increase, have already been cutting prices to secure sales. This started around late April,” added the Middle East-based observer.

“First of all they had to cut polyolefin pricing by $30-40/tonne and then from mid-May by $60-80//tonne.”

At the end of April, inventory levels among some of the region’s produces were 30-40% higher than they were at the end of February, he said.

Last week, Middle East producers had reduced offers for low-density polyethylene (LDPE) in Asia and linear low-density polyethylene (LLDPE) in Europe, according to ICIS.

This came as overall pricing once again slipped. Asian PE prices fell by $10-60/tonne, according to the 3 June ICIS pricing assessment with PP falling by $30-80/tonne. European LDPE had fallen by 13% since early April - or €180-200/tonne.

"At APIC producers were saying that this has gone on for too long; the price fall has to stop. But we do not know whether this will happen in 15 days or two months," says a source with an Indian polymer producer.

The source is now pinning his hopes on the start of the Chinese manufacturing and agricultural film seasons in July-August.

Traditionally, this is when demand picks up for polymer imports that are re-exported as finished goods ready for Christmas sales seasons in the West. 

This coincides with an increasing requirement for LDPE and LLDPE film used by farmers.

As we said, we should know very soon whether this is a mini-crisis for the industry - or something much worse.

Read Paul Hodges’ Chemicals & the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: John Richardson
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