20 December 2011 17:07 [Source: ICIS news]
By Abache Abreu
LONDON (ICIS)--Slow demand and price erosion are common during the destocking cycle, but will economic uncertainty extend the downtrend beyond the year-end and towards the feared double-dip recession?
Despite gloomy assessments of production trends observed in the commodities markets in the past few months, producers are more optimistic about production expectations than they were in 2008, when the credit crunch hit.
Figures from the European Commission show that economic sentiment in November in the EU was at 92.8, one point lower than in October 2011, but 22.3 points higher than in November 2008, when it hit its lowest level since January 1985. The 1990-2010 average for the indicator, which takes into account confidence in industrial, services, consumer, construction and retail trade sectors, is 100.
In chemicals, although stagnation of consumer confidence has been regarded as a warning sign of a sector-wide slowdown, there are important factors signalling that this time around things are not the same.
Firstly, chemical stocks in Europe are at much lower levels, as producers have brought forward the destocking cycle, amid fears of further economic decline.
Secondly, price developments in the upstream olefins markets have shown no indications of potential drops in January. This has helped maintain minimum levels of chemical consumption because customers are not concerned about losing competitiveness by purchasing high-priced feedstocks.
Finally, the situation in the export market is very different. Although no-one questions the potential global reach of a recession in the eurozone, most sources agree the crisis in 2011 is mainly European, and that the export market could offer an opportunity to recover volumes if currency exchange rates became more favourable and feedstock prices more competitive.
An oxo-alcohols producer said: “One of the big differences [with 2008] is inventory levels. In 2008, suppliers in the upstream market did not do anything to reduce stocks.
“This year people started to reduce inventories in the summer, after America’s [credit rating] downgrade, when we realised things did not look nice and cosy any more.
“[In 2008] the whole decade had been booming, so people didn’t anticipate the scenario would be so drastic. For the whole industry, it took six months to get rid of inventories."
The producer added: “People have learned so much from 2008. Producers have taken precautions… and are not sitting on huge inventories… Now we’ve had a bit softer landing.”
An acrylates producer said there is a lot of nervousness in the market, with everyone comparing 2008 with the current situation, but added that fundamentally it is not the same.
After the credit crunch hit, producers started selling below cost. “It was a real bloodbath,” the producer said. The situation now is more about fear and sentiment as opposed to true indicators. Margins are squeezed but nobody is selling below cost, it added.
“And January 2012 could bring a big upturn in buying interest, as everyone has run stocks down. Perhaps that is optimism, but it should become clear very early in the month. If it doesn’t pick up with a spike in January, then we have a wider economic problem.”
Another significant difference is price expectations in the upstream market. Unlike 2008, naphtha costs have remained high and relatively stable, while olefins have only experienced minor decreases, squeezing margins in the downstream markets, where shrinking demand has led to increasing competition and lower offers.
“Margins are nearly half of 2008 for some producers. It is absolutely unbelievable,” said a polyvinyl chloride (PVC) producer. “The difference in ethylene prices over the last three years is the same as the difference in our margin situation.”
Another producer said: "[PVC] prices have decreased steadily from July, whereas ethylene prices are much higher than three years ago. Margins are not really acceptable. We are at the rock bottom at the moment."
However, upstream stability has sustained market sentiment and trading activity, as market players are not concerned about purchasing high-priced material which might affect their competitiveness in future.
An oxo-alcohols and plasticisers producer said: “The good thing compared to 2008 is the feedstock situation. In 2008, it was clear that propylene was going down, so every producer was trying to get rid of product more or less at any price.
“Right now the market seems under certain control. We don’t expect any significant drop of feedstock prices in January. So we don’t need to worry about December feedstocks being too expensive."
Finally, although concerns about the eurozone debt crisis have been accompanied by weakness in the US economy and China's slowdown, most sources agree the crisis is now mainly European and that export markets could offer opportunities to offset low domestic demand.
“We are not approaching the levels of 2009, where the market dropped drastically. This time the crisis is European, not global. Asia and America will not crash,” said a third PVC producer.
Additional reporting by Nel Weddle and Truong Mellor
($1 = €0.77)
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