INSIGHT: Banks battle politics as petrochemical prices fall

28 September 2012 16:48  [Source: ICIS news]

By Joseph Chang

The European Central Bank in FrankfurtNEW YORK (ICIS)--You would think that the imminent unleashing of massive waves of liquidity by the world’s major central banks would create a more sustainable rally in commodity prices – from crude oil to iron ore to petrochemicals. Yet in the short run, quite the opposite is happening.

Crude oil fell to below $90/bbl (€69/bbl) on the New York Mercantile Exchange (NYMEX) as of 26 September, down about $10/bbl from recent highs, while Brent crude broke below $110/bbl. It’s interesting to note that crude oil prices have declined even in the face of increasing instability in the Middle East as protests against the US continue to flare up.

The downdraft in crude is weighing on global petrochemical prices, with notable declines in China.

Domestic spot prices of linear low density polyethylene (LLDPE) in China fell by an average of 2% on 26 September to a range of yuan (CNY) 10,850-11,100/tonne ($1,722-1,762/tonne) EXWH (ex-warehouse) as assessed by ICIS Chemease, as concerns about oversupply in the upcoming holidays triggered panic-selling.

The China market will be closed from 30 September to 7 October for the mid-autumn festival and National Day celebration.

But market sentiment had already been deteriorating on concerns around the once-in-a-decade leadership transition in China, and perhaps related to this, an escalating territorial dispute over islands with major trading partner Japan.

China’s $150bn infrastructure stimulus plan announced in early September has largely been overshadowed by these developments.

Meanwhile, the political situation in Europe is grieving the markets once again. Riots broke out in Spain’s capital Madrid this week over the government’s austerity measures. And Catalonia, a major self-governing region in the northeast of the country, is threatening secession.

Yields on 10-year Spanish bonds jumped to over 6% on the developments, and the country  is likely to be forced to seek a bailout, accepting further financial discipline measures in exchange.

The European Central Bank (ECB) is ready to open the money floodgates with unlimited buying of bonds of troubled nations to lower borrowing costs, but first the governments must apply for bailouts though the European Stability Mechanism (ESM).

The foot-dragging of Spain and Italy in doing so has in effect kept the ECB’s latest and most bold programme on the shelf.

Unencumbered by such bureaucracy is the US Federal Reserve’s quantitative easing (QE3) programme which will soak up $40bn/month in US mortgage securities until job growth reaches satisfactory levels.

The US is joined by the Bank of England’s £375bn ($615bn) and the Bank of Japan’s recently expanded ¥80 trillion ($1 trillion) QE programmes which are in effect. There is talk of further easing by the Bank of England.

The central banks are locked in a battle royale with deteriorating political forces and continued economic malaise.

It is very early, but so far the QE programmes have only resulted in a fleeting boost of confidence. Commodity asset prices have yet to inflate.

And it may take Spain and Italy finally requesting full government bailouts before we get the ball rolling on the road to global economic recovery. 

Additional reporting by Rain Dong in Shanghai

($1 = €0.77, CNY6.30, £0.61, Yen77.60)

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By: Joseph Chang
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