INSIGHT: Macroeconomic fears stall petrochemical markets

31 August 2011 16:34  [Source: ICIS news]

By Mark Victory

LONDON (ICIS)--You’re in a lift. At the 13th floor it jolts to a stop. The doors do not open. A splutter, then a shake - the lights go out. You have no idea what is happening and can only guess whether the lift will plummet or correct. You freeze - worried that the slightest movement could send the carriage plunging to the floor.

For many in the petrochemical market, this is how the financial climate feels, and fears of another macroeconomic collapse are limiting activity throughout the chain.

With trading conditions in the second half of the year opaque, chemical consumers are waiting on the sidelines until the true direction of the general economy and global growth becomes clear.

Traditional August holiday outages are being extended and inventories reduced to avoid taking a position. The end result is that prices in many chemical chains are stable through lack of trade.

“The market is looking to read about future direction, but no-one has a clue what’s going on. Everyone is preparing for the worst and this we see in the close monitoring of stocks,” a monoethylene glycol (MEG) producer said.

This is particularly true in downstream markets linked to construction and automotive applications, where consumption is heavily linked to GDP growth. But the impact is not limited solely to downstream industries.

Chemicals sectors that have been strongly affected by a slower-than-usual return to the market following the August holiday period include: methanol, white spirit, light solvent naphtha, polyols, acrylonitrile (ACN), from MEG through to recycled polyethylene terephthalate (R-PET), acetic acid, vinyl acetate monomer (VAM), phthalic anhydride (PA), solvents, and nylon (or polyamide).

Nevertheless, at the top of the petrochemical chain crude oil prices remain volatile, with contradictory economic data and currency exchange rates causing trading spikes and dips on an almost daily basis, as the chart shows.  Crude oil pricesThis is adding to the market confusion, with consumers eager to avoid stockpiling material in case of a price dip.

In many industries petrochemical players are focused on September as an arbiter of demand for the fourth quarter.

This could prove misleading. With so many buyers delaying restocking, consumption in September may not reflect true underlying demand, leading to an overly-bearish outlook than fundamentals dictate.

“Business is not doing well. September is normally [a] good recovery [month], but early indications are not looking good,” a TDI (toluene diisocycantate)/polyols buyer said.

In short, economic fears could lead chemical markets to talk themselves into another downturn.

“People are nervous that demand will be affected [by the macroeconomics]. It’s a self-fulfilling prophecy. Demand is now not so strong,” a buyer said.

It’s like jumping up and down in the lift because you're not sure if the cables can support the weight.

The confused economic picture means that there are several possibile scenarios for chemicals markets in the remainder of 2011.

The most serious of these is sustained slow or declining growth. The key end-use markets for chemicals are construction and automotives – demand from both is intertwined with growth.

On 16 August it was announced that eurozone growth in the second quarter of 2011 fell to just 0.2%, from 0.8% in the first quarter. Coupled with strong falls in stock market prices in the last month, inflationary pressures and rising unemployment, growth prospects on the surface appear weak.

Some downstream markets have already begun to see the impact of declining growth. In the methyl ethyl ketone (MEK), isopropanol (IPA) and methyl isobutyl ketone (MIBK) markets, for example, demand in August has been up to 30% below the same period in 2010, according to market estimates.

Nevertheless, not all markets are following the trend, particularly downstream sectors linked to automotives. According to nylon and maleic anhydride (MA) players, demand for physical goods remains strong, unphased by the gathering economic storm clouds.

Some European MA producers have seen September order book volumes up to 30% above forecasts, driven by strong demand from the German car industry. The nylon market is also seeing strong automotive demand from Germany, although in southern Europe car production is less bouyant.

In Germany, nylon players report that average lead times for vehicles to final customer are 4-6 months, up from the normal six weeks, adding that although macroeconomic fears abound and summer holidays have been extended, underlying consumption is buoyant.

“Everyone is worried about the [macroeconomic] situation, but we don’t expect changes [to nylon demand] unless there is a big recession. Demand is reasonable, despite what you see in the newspapers. People are screaming, but there’s a four month delay on cars [from Germany] and sales are the same as last year,” a nylon producer said.

Strong German automotive sales are linked to exports to Asia, but with reports of China limiting licensing for vehicles in major cities, there are concerns that Asian buying interest could fall in the second-half of 2011.

Also of concern is the impact of exchange rate movements on import/export volumes. With the US dollar and the euro both broadly weakening in August, export opportunities may develop to Asia and other regions where export prices could undercut locally produced material because of favourable exchange rates.

Where and when any export opportunities may develop will depend upon the rate of currency exchange rate falls, and the price of the US dollar in comparison to the euro.

The corollary to this will be in markets - such as nylon - where Asia is a high-volume exporter as well as importer. In these markets, the loss of export opportunities in Asia resulting from unfavourable exchange rates will mean more product is held domestically, which could stall demand for material from Europe.

The most favourable outcome for all concerned in the petrochemicals chain is for an upwards correction in stock markets and a recovery in European growth rates, which players do not rule out.

Conditions in the second half of 2011 will be dictated by far from clear macroeconomic conditions.

The petrochemical industry must avoid panic if it wishes to prevent talking itself into another downturn. It is no wonder that chemical markets are adopting an air of caution amid the uncertainty.

You’re in a lift - and you’re approaching the 13th floor.

($1 = €0.69)

Additional reporting by Heidi Finch, Brian Ford, Cuckoo James, Jane Massingham, Caroline Murray, and Ross Yeo

For more on the chemicals mentioned in this article visit ICIS chemical intelligence

By: Mark Victory
+44 208 652 3214

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