INSIGHT: Christmas comes early for Europe petrochemicals

16 September 2011 16:27  [Source: ICIS news]

By Julia Meehan

The expression “Christmas has come early” is typically a positive one, depicting prosperity and wishes coming true, but for the chemical industry in Europe talk of a year-end slowdown in September is making it feel quite the opposite.

Dark shadows hanging over the global economy are making commodity buyers up and down the petrochemicals chain increasingly nervous about holding stocks of any kind.

Destocking ahead of the year end is not normally a feature of the markets until November. But already this year, there are signs that end-users are managing inventories as if these were the weeks leading up to the Christmas holiday period.

A major producer in the coating sector, for instance, said “inventory management” is currently one of its key strategies.

“Because the markets are so nervous, there is a big question mark about what will happen in the fourth quarter of this year. Looking beyond that is proving difficult and nobody wants to take any risks.”

Strict inventory management is nothing new. Companies look back to dark days when, in the shockwaves of the financial crisis in late 2008, producers and consumers across the petrochemical chain were left holding high volumes of undervalued inventories. They suffered huge financial losses as a result.

Lessons were learned and keeping inventory levels low has been “par for the course” for the majority of industry players since. But this makes it very difficult for suppliers to gauge just how strong or weak their downstream demand is.

Of course, order books tell a tale. Participants involved in the phenol derivatives chain say that business remains healthy in September, although cracks are starting to show in some sectors further downstream and not every buyer is taking its full contractual volumes.

A major phenol producer said that demand was still “good” and that customers were simply being careful.

“I would describe the overall situation as cautious. Everybody is holding low inventories,” he said.

“There is no pessimism, just nervousness. Our resin demand is still good and so is our caprolactam demand.”

Another supplier of phenol and acetone said its demand was still “healthy” but conceded that some of its major contract partners in the bisphenol A (BPA) and methyl methacrylate (MMA) markets have “changed their buying behaviour”.

Indeed, a major producer of BPA described its situation as “a little darker” because polycarbonate (PC) demand was easing in the key China market.

Polycarbonate has been, and continues to be, the driving force for phenol production. But with Asia being the major growth area and demand for optical media applications in decline, PC buyers and bisphenol A (BPA) makers are reducing output and subsequently their feedstock demand.

This time last year the markets were still in full swing and the mood was very different. Market participants were very upbeat and optimistic and many chemical prices were at recorded highs.

The problem for the market now, however, is that the mood is no longer upbeat and optimistic, but prices for many chemicals are still at or hovering below record highs. In such an environment nobody wants a warehouse full of material and no cash in the bank.

Cash is king at year end, but it seems with so much global economic uncertainty now is the time for market players to be putting cash away.

Yet it is not all doom and gloom.

BASF told investors this week, for instance, that it had seen no material decline in demand across most of its end use markets related to the macroeconomic environment. Construction was the exception.

Credit Suisse said it had learned from a presentation by BASF management that both August and September activity levels and order books had tracked above 2010 levels. “Importantly, forward visibility remains at three months and customer inventories are low,” it noted.

Sources confirm that demand has slowed, but that it is coming down from very high and, for some products, even record levels.

Prices remain firm and healthy margins can still be made. If demand was shrinking rapidly prices would be expected to follow but this does not seem to be the case.

Despite the air of nervousness and caution, the petrochemical sector can still expect a reasonably happy Christmas, although one that has arrived prematurely.

In certain countries the major winter holiday period seems to come earlier every year anyway. Cards and wrapping paper are already in the shops this September, so isn’t the petrochemical industry just following the trend?

Bookmark Paul Hodges' Chemicals and the Economy blog for ICIS

By: Julia Meehan
+44 20 8652 3214

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