INSIGHT: Approaching 2012 with caution

30 December 2011 14:10  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--It is becoming difficult to remember how good things were earlier in 2011 when demand was strong and prices high.

But in case we forget, the first half of the year was better than anyone in January had dared to expect. Healthy demand was translating into strong margins for most sector players. A rising oil price was stimulating forward buying

Upstream, good money was to be made close to the cracker – particularly if you were cracking liquids and benefitting from excellent co-product credits.

The IPEX index of petrochemical prices shows that companies began to find it hard to push prices higher from around May and by September were being forced to lower their offers. ICIS was reporting at the time that August had been a flat month – as might be expected at the height of the northern hemisphere summer.

By September, it felt in some markets that Christmas had come early because everyone seemed to be sitting on minimum inventory. Senor petrochemical industry executives at the time, while acutely aware of the potential impact of the debt crisis on the US and European economies, were talking simply of soft markets.

National economic as well as industry statistics have shown since then that growth has stalled. Some eurozone economies currently could be in recession. The outlook for the euro is bleak indeed.

ICIS Petrochemical Index

Critical sovereign debt issues in Europe hang heavily over the global economy and have driven financial as well as consumer and industrial market sentiment in recent weeks. Negative one minute, positive the next, it has become increasingly difficult to assess how producers might in the early part of 2012 at least be able to match supply with demand.

The decline in prices for some key petrochemicals such as butadiene has halted, for example, as buyers have been forced back into the market, although it is by no means clear that demand and prices will not fall further at the start of 2012.

In China, buying has been brought a long way forward from the start of the Lunar New Year (on 23 January). The next few weeks in China's markets are expected to be quiet to say the least.

In Europe, cracker operating rates were 70% on average in September but cut to between 50% and 70% in November, an industry observer said recently.

The picture in the US has been different and reflective of a slow growing economy but one that is growing, nevertheless. Cracker operating rates have been relatively healthy since August and were above 90% in November, consultants suggest.

The eurozone crisis raises deep concerns at the end of 2011 and it looks as though a positive resolution can only be achieved through a slow, painful process. This will delay the recovery in Europe and blight regional chemicals growth for much of the year.

The crisis hangs heavily over the global economy and will lead to subdued global economic growth for 2012. That will translate directly into slow chemicals demand through the early part of the year.

A high oil price may help preserve margins upstream, although volumes could be low. Downstream players will be squeezed between input costs and customers who have to react to end-market weakness.

Chemical producers are not necessarily downbeat entering 2012 but remain extremely cautious.

Read Paul Hodges Chemicals & the Economy blog
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By: Nigel Davis
+44 20 8652 3214

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