Corrected: INSIGHT: Stock plays still mask underlying demand growth

16 October 2013 17:21  [Source: ICIS news]

Correction: In the ICIS story headlined "INSIGHT: Stock plays still mask underlying demand growth" dated 16 October 2013, please read in the 11th paragraph ... a disorderly de-stocking process ... instead of ... an orderly de-stocking process .... A corrected story follows.

By Nigel Davis

LONDON (ICIS)--September was good, then bad, at least for some. And there are those that believe that petrochemical and polymer producers have virtually written off any demand growth in the fourth quarter.

Ahead of the third-quarter results season there is not a great deal of good news around, although commentators continue to point to certain indicators that suggest that better times might just be around the corner.

It is all relative, of course. “Never clutch a falling knife,” a European polyethylene buyer said this week, talking of the PE price outlook ahead of the giant K plastics fair which opens in Dusseldorf on Thursday.

Uncertainty abounds, not just in the polyethylene market but across much of the petrochemical and polymer industries.

For PE in Europe, no buyer or seller wants to hold high-priced stock in a potentially falling market, yet all are concerned that there may be a sharp (price) upturn, ICIS reported on Wednesday.

European petrochemical and plastics prices are moving largely in relation to naphtha and, therefore, to crude oil. Demand growth remains very low. It is hardly surprising that buyers and sellers are living from hand to mouth.

Generally PE demand in September was weak and stronger volumes are expected in October.

European producers are not in a good place with such low levels of demand growth and little in the way of any clear indication that 2014 might be any better. They also operate in a very high-cost part of the world.

China may be different, but there is a huge discrepancy between the apparent 14% rise in China’s PE demand growth (domestic production plus imports) between January and August this year and producer and buyer estimates of full year 2013 demand growth of just 3-6%.

Numbers like this only serve to highlight the uncertainty which persists at the local as well as the macroeconomic level.

John Richardson from ICIS suggests in this blog post that we may see a disorderly de-stocking process in the China PE market this year, similar to that seen in 2011 and 2012 although not on the same scale. He says that the real issue is the underlying strength of demand when stock building has been discounted.

Industry analyst, Paul Satchell, of Canaccord Genuity, has noted a decline in his Volume Proxy index which links published petrochemical prices to regional volume growth. The Index has tracked downwards significantly since a peak in late August. Europe looked strong in the third quarter but is the main regional factor in the current decline, Satchell says.

“Asia, which had declined (unsurprisingly at the end of peak manufacturing purchasing) has now stabilised. Given that the Golden Week holiday has just passed, we see some scope for near-term upside in that component of the index. The US line remains firmly neutral.”

In such a globally low-growth environment it is difficult assess trends. It is better to consider a range of possible futures and the best way of making money under these different scenarios both tactically and strategically.

The Canaccord Genuity view is that the volume demand improvement in the third quarter was the latest sequence in a pattern that has become established in the sector since mid 2010. “True demand fundamentals have been so fragile, for so long, that inventory cycles have become the prime determinant of marginal demand.

"Hence, the rare quarters where volumes (in basic chemicals) have been decent have coincided with periods of robust outlooks for oil prices. Naturally, these have been followed by de-stocking when oil prices softened.”

Satchell says that the risk outlook has become more complex. Macro economic data suggest some upside potential for Europe and China, he says. The investment bank remains sceptical on Europe because of the link in chemicals to under-performing sectors such as construction and automobiles.

He is nervous about China ahead of the Third Plenum of the communist party in November which Canaccord Genuity sees as a “material risk event”. The plenary session of the party is expected to map out a reform agenda for China’s economy.

(Additional reporting by Linda Naylor)

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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