INSIGHT: Steep falls in end-use demand hit chems in November

14 November 2011 17:29  [Source: ICIS news]

LONDON (ICIS)--I stare down at my latest electricity bill – it’s higher than I was expecting. The price of my weekly shopping, which is languishing on the kitchen counter as I’m too lazy to unpack, is going up too.

As the cost of living increases across Europe because of rising inflation, consumer purchasing power is reduced – and consumers are increasingly avoiding non-essentials. The impact on demand in European petrochemical markets is significant.

“It’s unbelievably slow – it’s like [the global recession in] 2008, it’s worse – not only here in Italy. Talking with my other [worldwide] colleagues, it’s lousy. Since October it’s been like 2008,” a maleic anhydride (MA) and phthalic anhydride (PA) trader said.

In products as diverse as solvents, phenol, bisphenol A (BPA), melamine; to the polyamide chain of cyclohexane (CX), caprolactam (capro), adipic acid (AA) and nylon (or polyamide); through polyethylene terephthalate (PET), MA and PA, November demand is expected to fall sharply year on year. The most common forecast is for a drop of 20–30% in consumption in November 2011 from November 2010.

The bulk of that fall is expected to come from the automotive market. The year-on-year fall in November demand for petrochemical industry segments linked heavily to automotives, such as nylon, is forecast by some to be as high as 50%.

“The market is strongly slowing down both in engineering plastics [used in automotives] and textiles. Lots of order cancellations. [November] year-on-year demand is down 45–50%. It’s easy to imagine December will be 50% of normal volumes,” a nylon buyer said.

Despite declining macroeconomic conditions, auto purchases had remained strong in September and October. In September, for example, some European MA producers saw order-book volumes up to 30% above forecasts, driven by strong demand from the German car industry. Some MA producers continue to see demand as stable year on year.

“For sure demand is cooling down, but that’s pretty normal. It’s pretty much in line with last year, if you actually look at the figures,” a major MA producer said.

During the third quarter, the majority of finished automobile production in Germany was being exported to Asia – in particular China – with market estimates that 50% of finished goods were being shipped overseas. Asian buying interest is now low, and accounts for much of the drop, but consumer buying interest in Europe is also falling as fears of a second recession mount.

Other end-use industries, such as construction, have not been as severely impacted because they were starting from a lower base. For many of the downstream chemical markets, automotives had been the strong performer during much of 2011.

The fourth quarter is traditionally the low season for the key downstream automotive and construction markets, but the fall in demand has been beyond what was anticipated.

“Normally it [demand] would go down a few percent, but now it’s a bit more. Volumes haven’t picked up as expected after the holidays,” said a major coatings producer – which estimated a fall in demand of 7–10% since the end of the second quarter.

Weaker demand is likely to put downward pressure on prices, and values are already eroding in many markets. Nevertheless, with Brent crude oil prices continuing to hover above $100/bbl and volatile exchange rates, feedstock costs are not under the same pressure – resulting in declining margins.

This has already been seen in the nylon 6 market. European October nylon 6 contracts settled at a reduction of €150–250/tonne from September, while feedstock October caprolactam contracts fell by €80–90/tonne.

In PET too, suppliers are likely to have to give away more than the raw material costs in November because of the lack of demand, sources said.

“Demand compared to the same time last year was down 7–10%," a BPA producer said. "That’s significant compared to the time of year and with December approaching; the big concern is that feedstock phenol was 36% cheaper in Asia than in Europe, which leaves us uncompetitive in Europe.”

Buying interest is changing rapidly as markets react to volatile trading conditions, which means that forecasts for November demand are uncertain.

In some markets, for example caprolactam, buyers have said that order cancellations and delays are now common in downstream applications, but they are unable to place exact figures on the level of order cancellations.

“Downstream, in every application – automotives, textiles, we’re recording every day cancellations or delays... it’s a dynamic situation, maybe minus 20–25% [demand] from October, which means only 10 days ago, but the situation is changing, it’s very volatile,” a caprolactam buyer said last week.

The majority of downstream consumers are purchasing on a just-in-time basis because of macroeconomic uncertainty, which means that order book volumes at the start of each month are low and it is difficult to assess where volumes will finish at the end of each month.

“Orders are low at the start of the month because of just-in-time buying. It’s changing during the month, so forecasts aren’t accurate – or at least not as accurate as normal,” a major MA producer said.

Reduced consumer purchasing power is not the sole factor behind reduced buying, however. Consumers in most markets are heavily destocking in order to lower working capital.

“There are a lot of insecurities and people just don’t have the cash. They aren’t going to pre-buy because it’s very risky,” a major PET producer said.

End-of-year destocking – which would traditionally begin in late November/early December – began early this year as consumers looked to limit exposure to any possible general economic downturn.

Several traders, particularly in the solvents markets, have said that they have received orders from head office to reduce inventories as much as possible

Consumption is not expected to pick up in 2011, as buyers focus on year-end balance sheets.

This has led to debate among those serving downstream markets as to how much of the lower demand is due to a fall in underlying buying interest, and how much is psychological. Memories of the global economic downturn are still fresh, and many were caught out with overpriced stock when the recession hit petrochemical markets in late 2008.

“It’s started early [destocking]. There’s a lot of pressure, a lot of psychology. On one hand it’s more psychology than anything – we remember 2008,” an adipic acid and caprolactam producer said.

Views on demand are also highly regionalised, with the south of Europe more bearish than the north. This is because the south has been more heavily affected by the eurozone crisis.

“For November and December it looks really bad. The construction industry in Italy, particularly, is very slow because of political uncertainty, and some businesses are now temporarily shutting production. But the caution is the same for Greece, and will Spain have problems too? It’s really hard to speculate but people want to save. We are keeping low inventories,” a melamine buyer said.

There is also speculation in markets such as nylon and maleic anhydride that restocking in January – because of consumers lowering inventories too heavily in the fourth quarter – could cause shortages in the first quarter of 2012, reversing any price erosion seen in the fourth quarter of 2011.

Regardless of the causes of weaker demand, two things are clear. First, consumption is weakening fast, putting heavy pressure on downstream prices, and could squeeze margins. Second, I’m paying too much for electricity.

($1 = €0.72)

Additional reporting by Cuckoo James, Julia Meehan, Caroline Murray and Helena Strathearn

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By: Mark Victory
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