INSIGHT: Chemical players seeking to maintain balance in 2012

03 January 2012 16:15  [Source: ICIS news]

By Nigel Davis

Hoping for brightness to returnLONDON (ICIS)--Chemical producers will be doing their utmost to keep supply, demand and inventories balanced at the start of 2012.

This is a difficult time, overshadowed by the eurozone debt crisis and deep financial woes. The world’s economies have powered down, and are likely at best to produce only lacklustre growth in the first half of the year. To date, manufacturing output has contracted, but not collapsed, as it did at the end of 2008.

Producers of most petrochemicals and polymers in most regions expect a slow start to the year, and have all but discounted the first quarter. Business is extremely quiet, and has been in some markets for weeks. Activity generally is not expected to pick up until after the Lunar New Year holiday, which begins in China on 23 January.

Chinese buyers particularly see no reason to buy ahead. It is currently better to hold cash than stock.

But as many of the year-end outlooks published by ICIS over the past two weeks have shown, chemicals markets remain relatively tight, with the high oil price underpinning prices.

The industry is in a new place, with seller and buyer inventories fine-tuned. The strain on supply chains that became apparent through 2010 and the early part of 2011 could return if demand picks up more strongly than expected. Price bubbles could be a feature in some markets in 2012.

In businesses as diverse as chloralkali, polymers and polyethylene terephthalate (PET), demand is weak – although the outlook is mixed.

Demand growth for PET in the Americas, for instance, could be strong, driven by the expansion of business in parts of South America and continued recovery in the US. European PET bottle markets will be given a boost by the Olympics effect, but Asia’s polyester demand patterns continue to hold the key. A slowing Chinese economy could expose oversupply in Asia. Alternatively, stronger demand growth could suck in product from deep-sea markets.

Forecasting is extremely difficult at present. Industry players have suggested that they can only see weeks, rather than months, ahead.

Executives stress the differences between now and 2008–2009, when the economy collapsed. Industry inventories then were relatively high, and holders of those inventories suffered greatly. A producer of formaldehyde, for instance, has estimated that if underlying demand had decreased by 10% in 2009, actual consumption was down 50% as buyers attempted to clear stocks.

Lessons have been learned, and a tight leash has been kept on inventories and working capital.

Indeed, some players in some markets expect 2012 to be a continuation of 2011, when growth was relatively steady.

However, the most significant downturns have arguably been in olefins, where weak polyolefins demand has reflected back up the chain and where producers have been squeezed by high liquid feedstock costs.

Cracker operating rates in Europe and Asia, for example, have come down sharply since September – although they have held up in the US, where producers make use mostly of gas feed.

The low cracker rates reflect muted business and the desire to produce only what can be consumed. As co-product credits have shrunk – particularly on the sliding butadiene price – margins have been under intense pressure. Cracker operators in Asia have faced difficult times.

Towards the end of one holiday period and the start of the next markets are bound to be slow and trade thin. And it is likely to be February, at the earliest, before there is much light on the horizon.

“We have to be prepared for all scenarios,” a European olefins producer said towards the end of last month. That sentiment could be echoed throughout an industry that remains geared up for better times, but very much prepared for anything.

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By: Nigel Davis
+44 20 8652 3214

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