OUTLOOK ’12: Europe MA players see risk of 2012 price bubbles

30 December 2011 14:45  [Source: ICIS news]

By Mark Victory

LONDON (ICIS)--European maleic anhydride (MA) buyers and sellers are divided over their growth forecasts for 2012, depending on their macroeconomic outlook.

Producers are expecting a recovery in consumption of 2–5%, based on expectations of improving conditions in the second half of the year.

“I would definitely say for all applications, I think MA will have higher demand [in 2012]. To be conservative, we’ll say 3% [growth year on year],” one MA producer said.

Buyers – and some traders – are forecasting lower demand, although they could not give exact figures.

Applications downstream of MA, such as automotives and construction, are heavily linked to GDP. As a result, the product’s growth will largely depend on macroeconomic conditions.

“2012 is very insecure at the moment. It’s difficult to predict... It really depends on how people see the economy,” an MA buyer said.

The major downstream application for MA in Europe is unsaturated polyester resins (UPR), accounting for over 50% of all MA consumption. The majority of MA buyers and traders are expecting weak demand in 2012.

“For 2012 in general, there will be some slowdown – it will reflect the UPR planning,” an MA trader said.

Because financial markets are volatile and the evolution of the eurozone crisis is uncertain, forecasts are not firm and subject to heavy revision.

“2012 is unpredictable. The market is standing still waiting for January,” another producer said.

Uncertainty over general economic conditions has lead to heavier-than-usual destocking in the fourth quarter of 2011. This was not only to reduce working capital in year-end balance sheets, but also to increase cash reserves to help offset the potential risks of a double-dip recession.

Buyers expect inventory levels to remain low into 2012, as economic fears are overriding stock needs.

“People are trying to manage budgets – they’re not concerned [about the] day-to-day markets. No-one wants material in stock. No-one will commit, even for January,” another MA trader said.

As a result of the heavy destocking, pipelines are low. Several sources caution that if low inventories are maintained in 2012, price spikes and temporary bubbles could become a feature of the market – leading to increased price volatility.

“Price spikes could happen. The two last years, we’ve seen that, especially if weather conditions kick in, causing logistical delays. It could cause problems – no-one has inventories,” an MA buyer said.

Low inventories mean that there is no slack in the supply chain. Because there are no reserves to draw on, some sources argue that if demand increases or there are production problems, the market will tighten very quickly – resulting in sharp price increases that will fall away as soon as problems are resolved.

“”Price spikes will be a feature [of 2012] for sure, but very short-term. [Prices could increase] maybe 30–40%, as there’s no buffer stock. People will continue with low inventories. It’s a management decision. People are aware of the risk, but they say: ‘Okay, we expect price bubbles, but they will be short,’” a trader said.

Producers are also expecting fewer imports into Europe in 2012. This is because of a combination of a strengthening US dollar against the euro, long lead times and forecasts of rising benzene prices in 2012, which will leave imports uncompetitive compared with European prices.

Prices outside Europe are priced in US dollars.

Because of volatile macroeconomic conditions, the majority of buyers are unwilling to purchase material with lead times of between six and eight weeks, which is the average lead time for imported material. They are concerned about the risk of being left with overpriced stock if market prices move prior to the material landing.

The majority of MA plants outside of Europe are benzene-based. The majority of MA plants within Europe are normal butane-based.

“With the weak euro and high benzene [prices], there will be [fewer] imports into Europe. The US will focus on South America,” an MA producer said.

For more on MA visit ICIS chemical intelligence

By: Mark Victory
+44 208 652 3214

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