INSIGHT: Resigned to a difficult quarter

25 July 2012 16:19  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Financial results from petrochemicals major INEOS on Tuesday gave an indication of how awkward the operating environment became in the second quarter.

Other producers will report this week with expected similar commentary of their own.

High cost inventories were a burden for the Switzerland-headquartered producer as the oil price dropped and it proved difficult to hold on to petrochemical and polymer prices.

The interplay between buyer activity, a falling feedstock cost environment and widespread economic uncertainty produced a largely negative result with margins downstream from the cracker under pressure.

US business stood out as clearly benefiting from low gas-cost cracker margins. But markets worldwide were tough in the quarter and those in Asia particularly so.

INEOS saw its second quarter EBITDA (earnings before interest, tax, depreciation and amortisation) fall 46.5% from the 2011 second quarter and 33.8% from the first quarter of 2012. It incurred significant inventory holding losses, mainly in its olefins and polymers businesses.

Currently, petrochemical and olefins and polymer markets generally are gripped by the strong desire from producers to push prices higher while customer industries remain sluggish.

But midway through the seasonally weak third quarter is hardly the best time to be talking about price increases.

The third quarter is proving to be a struggle no matter where you are placed in polyolefins or in other major petrochemical value chains.

Looking at polyethylene specifically, ICIS data released this week showed that both integrated and non-integrated margins are under pressure in Europe from higher naphtha costs.

Higher ethane prices in the US have pushed integrated and standalone low and high density PE (LDPE and HDPE) producer margins to their lowest this year since January.

Integrated and standalone LDPE margins in Asia have been significantly lower so far in July compared to June.

The weakness in polyolefins in the second quarter was matched if not beaten by weakness in glycols and certain other polymers, INEOS said on Tuesday.

Macroeconomic uncertainty coupled with lower feedstock prices influenced sentiment across the company’s intermediates businesses.

Downstream demand for products such as acrylic fibres and the engineering plastic ABS (acrylonitrile butadiene styrene) remained relatively weak.

Ethylene oxide demand held up in Europe in the second quarter, INEOS said, but demand for glycols was slow, particularly in Asia. Demand weakened down the polyester chain and polyester makers cut back production.

Other major petrochemical producers will report on a difficult quarter this week and their figures are not expected to be good.

And unfortunately, the outlook is not encouraging – forecast statements from chemical sector companies in the coming days are not expected to provide much direction.

The eurozone crisis and government austerity measures are having a negative impact on important customer sectors for chemicals such as construction as well as on wider industry. June was a difficult month for many of the world’s economies and one of weak or slowed growth in Europe, the US and Asia.

The IMF on Wednesday said that China’s GDP growth will slow to 8% this year. Growth of the manufacturing powerhouse has been limited to a greater-than-expected extent by the eurozone crisis.

The chemical markets currently are difficult to say the least.

In Europe the mood is one of resignation rather than optimism, a polyolefins market player said this week, adding that in global markets, it is more desperation over reality.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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