Commentary: Chemical markets turn sour

21 May 2012 00:00  [Source: ICB]

As the deepening eurozone crisis threatens growth elsewhere, confidence is draining away from some chemical and polymer markets with prices dropping for many commodities

Crumppling Euro, Rex Features

 Rex Features

The crumpling eurozone is hitting market sentiment

A great many petrochemical and polymers prices have experienced steep falls during May across many regions and worsening market sentiment would suggest they may still have further to go.

The downturn is driven by jitters over the health of the global economy. The eurozone crisis is on everyone's mind, and its wider impact was a major topic at last week's Asia Petrochemical Industry Conference. The region narrowly avoided falling into recession in the first quarter of 2012, but the mess that many of the region's economies are in threatens the future viability of the whole euro project.

As arguments continue over whether austerity or increased spending is the way to return to growth, there is a growing sense of political inertia as successive governments and leaders are thrown out by an increasingly restless population. Traders are already preparing for the return of the Greek drachma as the country grapples with the effect of a five-year recession. New elections are likely to return an anti-austerity government, which is most likely not to stick to the deal struck by the previous incumbents.

The UK - like Spain, which has 25% unemployment - has fallen into recession and there are reports of nervous investors pulling euro funds out of Spain as well as Greece. Confidence in European financial system is as low now as at any time since the 2008 crash.

For the chemical industry, the impact is widespread. As growth stalls in Europe, its citizens also stop buying goods manufactured in Asia and elsewhere. China is still a major exporter to Europe and any drop-off in demand from there will add to the country's own faltering economic growth. There are even fears that recovery of the mighty US economy may be hit by Europe.

Along the supply chain companies may once again be running down inventories in the expectation that prices will continue to fall following the recent declines in global oil prices. This follows a stronger first quarter, during which restocking took place after the torrid end of 2011.

Spot benzene prices in the US, Europe and Asia plunged last week as naphtha declined amid ample supply. Polyethylene (PE) prices also fell across Asia and Europe as feedstocks dropped and sentiment weakened. Even US propylene contracts have been hit, suffering their first fall of 2012.

Stronger leadership by European and global leaders is vital to tackle this crisis and fend off another financial crisis.

By: Will Beacham
+44 20 8652 3214

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