INSIGHT: Rising petchem prices don’t tell the whole story

14 March 2012 17:48  [Source: ICIS news]

By Mark Victory

LONDON (ICIS)--My mother always taught me “don’t judge a book by its cover” which was a strange maxim, given that she always bought the shiniest volume on the bookshop shelf. But the saying is apt for the European chemical markets today.

In most downstream markets, prices are rising, and there is talk in several of better than expected demand in February and March. Beyond the headlines, though, the picture is not so bright.

Although prices are on an upward trend, feedstock cost rises since the beginning of 2012 have not been passed into the majority of downstream markets, and margins are squeezed.

A strong example is the widely-used solvent and intermediate, methyl isobutyl ketone (MIBK). Since the start of 2012, feedstock acetone spot prices have risen by 77–79%. In the same period, MIBK prices have increased by just 7–10%.

“We’ve had two pretty tough months of feedstock cost rises. It’s one thing to have it when things are booming, and another when things are petering [out]. We’re focussing pretty heavily on margins,” a solvents producer said.

In other markets, the figures are not so stark. Nevertheless, the pressure from rising costs is being felt throughout the downstream petrochemical chains.

Brent crude continues to trade above $125/bbl (€95/bbl). Butadiene (BD) contract prices have increased by €535/tonne, or 32.4%, from their December settlement. Benzene contract prices have risen by 40%, propylene contracts have increased by 20%, and ethylene contract prices by 21%, during the same period.

Northern European demand in February and March for most downstream products may have been better than expected but, amid continued macroeconomic uncertainty, expectations are low. Consumption for many products remains below 2012 levels and the majority of price rises are not being driven by demand, but by cost.

“The [buying] panic’s past. What’s going to happen now with the feedstocks all at record highs?,” a downstream chemicals trader said.

Northern European automotive markets, in particular, have been performing above expectations.

The majority of automotive buying interest, however, is coming from Germany and Austria, which have been less severely affected by the euro debt crisis, and where exports are high. Over 50% of all finished German automotives are shipped overseas – particularly to Asia – according to market estimates.

This complicates matters, as it means that a significant proportion of demand is reliant on the competitiveness of European products in other regions. The volatility of supply and demand conditions outside of Europe, exchange rate movements, government fiscal policy, and transport costs add another layer of uncertainty in markets which are already difficult to predict because of a lack of macroeconomic transparency.

“You have to work very closely with all your customers, and they with theirs. It’s not an easy time,” a solvents producer said.

End-users in the automotive industry typically look to balance unit costs against long-term pricing strategies linked to marketing campaigns.

An uncertain outlook makes end users more resistant to price increases, meaning that downstream chemical market players have to perform a tightrope balancing act between feedstock costs and the struggle to pass costs downstream into consumer-facing markets.

“Everyone must fight and deepen his position. If they [downstream markets] fight for the last cents and euros, it’s because they need to... I think that there is everywhere a fight. Whether it will remain, I don’t know – but it’s drastic,” a downstream trader said.

Worryingly, in Asia, butadiene rubber (BR) margins are negative because of high-BD costs, and BR producers are cutting back operating rates. BR is heavily-linked to automotive markets and negative margins suggest that demand is not strong enough to support price increases.

In other Asian markets, too, such as expandable polystyrene (EPS), polyester, dioctyl phthalate (DOP), monoethylene glycol (MEG), high density polyethylene (HDPE), purified terephthalic acid (PTA), caustic soda and bitumen, demand is weak.

With European markets looking to Asia to buy volumes, this paints a disconcerting picture and suggests that the current high buying interest might not be sustainable.

There is also strong variation in demand within Europe. In southern Europe – which sees lower export volumes – automotive demand is poor because of reduced consumer purchasing power resulting from the debt crisis.

“Demand is quite low and getting softer. It's 10–15% lower in terms of year-on-year demand so far,” a nylon compounder said.

In markets such as acrylates, nylon (or polyamide), polyurethanes (PU) and adipic acid (ADA), buyers continue to purchase on a just-in-time basis because of fears for the sustainability of general economic recovery.

“In the PU chain it’s just-in-time buying. As soon as you have a [production] problem, you’re in trouble; big trouble,” a nylon and polyurethanes producer said.

Inventory levels were significantly reduced at the end of 2011 to manage working capital in year-end balance sheets and to mitigate against the risks of a double-dip recession.

“You cannot afford to have one month’s worth of inventory in the commodity markets in such volatile economic conditions,” a polyvinyl chloride (PVC) producer said.

Nevertheless, inventory management may have been more severe than necessary.

Empty pipelines in markets such as maleic anhydride (MA), caprolactam and nylon have meant that any pick-up in demand or supply problems leads to a flurry of purchasing as buyers look to cover their short-term needs.

The threat of further upstream cost increases has also led to heavy pre-buying in nylon, capro, phthalic anhydride (PA) and isopropanol (IPA) within the past three months as buyers have attempted to secure material ahead of cost increases being passed on.

This is why, throughout 2012 so far, it has been impossible for most chemical market players to assess how much underlying demand there really is and how much is just restocking or pre-buying.

Although there are downstream products in Europe which are returning to profitability, such as maleic anhydride (MA), DOP and PVC, the cause of the rises in each of these markets has been production outages combined with low stock levels, resulting in panic buying to ensure supply.

This has led to the spectre of price bubbles, which may already be taking place in some markets, with prices spiking during any production hiccups or rise in demand and falling back as soon as supply issues are resolved.

“I sense a... classic bubble. Prices ramped up purely due to feedstock costs and lack of supply and not through demand fundamentals,” a polyethylene terephthalate (PET) trader said.

MA prices have already begun falling back. Last week, MA spot prices dropped by €50-100/tonne, despite product remaining tight, as panic buying drew to a close and buyers moved to the sidelines awaiting further indications on how long the tight supply will last.

There has been no update on the production situation at Sasol-Huntsman, but several of its customers believe the force majeure on MA remains in place, and it is not known when it will be lifted. Other markets may follow when supply improves.

“The cat is out, and it is not a tame cat anymore. It will be a wild one,” a polyethylene (PE) pipe buyer said on the inversely proportional relationship between demand and prices, and the bubble that looks as if it is about to burst.

High feedstock costs, uncertain conditions and short-term demand spikes are increasing downstream volatility, and margin recovery for many remains out of sync with feedstock cost rises.

The cover story may be that petrochemical prices are improving, but the plot has a lot more twists and turns yet.

($1 = €0.76)

Additional reporting by: Abache Abreu, Truong Mellor, Caroline Murray, Cuckoo Susan James.

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By: Mark Victory
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