INSIGHT: Market plagued by uncertainty

10 October 2011 18:07  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Petrochemical producers were talking about the third-quarter slowdown at the European Petrochemical Association (EPCA) meeting in Berlin at the beginning of October. Markets currently, they suggested, were “soft”.

August was slower than is traditional, with customers unwilling to commit to volumes in what many saw as a declining price environment. September was not as good as might have been expected and October not hot either.

Hardly surprisingly in the current global economic environment, supply chains were said to be tight, with no-one wanting to hold inventory.

A slowdown from the strong first and second quarters was to be expected, however. Margins in the sector were overblown in the first quarter, with capacity tight and prices high.  

Plants have come back on stream as markets have lengthened and prices come off in some cases from all-time highs. Demand has weakened but not collapsed, with manufacturing industry still ticking over, although overshadowed by the achingly slow economic recovery in the US, the eurozone debt crisis and, vitally important for chemicals, China’s ongoing battle with inflation.

Yet Nexant ChemSystems released some data on Friday 7 October that suggests that the downturn might have been more severe.

“Market sentiment deteriorated dramatically in the third quarter as confidence in the global economic outlook waned and fears of the ‘double dip’ recession hung over the market,” the consulting firm said.

“Margins stalled,” it added.

The decline was sharpest in Europe, with Nexant’s petrochemical and polymer margin index falling by more than 40% in the third quarter compared with the index average in the first half.

“The third quarter saw a dramatic change in fortunes for European petrochemical producers, with average profitability across the industry collapsing to its lowest since the global financial crisis took hold,” Nexant ChemSystems said.

Average margins for the sector in the quarter fell by about 15%, dropping to their lowest for 18 months.

Demand weakened in Asia from the second half of July, but a busy period of maintenance appears to have buoyed the situation. Nexant’s Middle East cash margin index fell by 1% in the quarter from the first-half average as sales of olefins and polyolefins into the European market felt the pressure from decreased confidence.

ICIS data has shown a similar deterioration in margins in the latest quarter, with cracker margins in Europe coming off a second-quarter high. Monthly olefins prices have been under pressure but have been sustained, although it is apparent that demand has suffered.

Cracker operators at EPCA were among those referring to market conditions as “soft”. There is a great deal of uncertainty and it is not only related to the European situation. The ChemSystems data look their worst for European polymers.

“Profitability of the polymer sector was severely depressed in the third quarter, with polyolefins, polystyrene [PS] and PVC [polyvinyl chloride] posting the lowest margins of all the commodity petrochemicals in Europe,” the consulting firm said.

“Many convertors held high inventories and were reluctant to return to resin purchases after the slow summer holiday period as the economic outlook deteriorated.” Its polymer margin index “posted its second lowest rating in the last two decades”.

Integrated producers could take margin at the cracker – so integrated polymer margins do not look too bad. But standalone players must have struggled, as ChemSystems suggests, to achieve variable cost break-even at times.

The profitability of petrochemical intermediates, based on the ChemSystems analysis, increased in the quarter but only largely because of stronger seasonal demand for polyester. Asia markets were kept tight by strong demand and production outages in Asia and the Middle East.

The consultancy company’s data point to a difficult period for petrochemicals with profitability slipping away in a weakened demand environment.

On the positive side for olefins, at least, is a relatively beneficial supply/demand situation that suggests that should market conditions improve, then producer fortunes can be revived.

“We shouldn’t lose sight that the fundamentals are still good,” a major petrochemical player said on the sidelines of the EPCA meeting.

Uncertainty plagues petrochemical and polymer markets at the start of the final quarter of 2011, with little sign of any let-up.

Petrochemical and polymer cash margins in Europe

Source: Nexant ChemSystems

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By: Nigel Davis
+44 20 8652 3214

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