INSIGHT: Chemicals output at year end is confusing the picture

20 December 2013 16:53  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Chemical production growth in China and increased volumes in Europe and the US are confusing the outlook.

Production might be expected to slow down towards the end of the calendar year as companies approach their financial year end and look to run down stocks to reduce working capital.

The trend should expose real demand and allow for some stock build up in the early weeks of January.

Current price discussions for quite a wide range of petrochemical products suggest that this is the case, with producers finding it hard to raise prices on higher feedstock costs because of lacklustre downstream demand.

But sector and chemical segment output data are pointing to surprisingly strong volume growth in recent weeks. The data look good from a China, US and Europe perspective.

This might be because of a stock build-up ahead of the lunar new year, which falls at the end of January. It might also be due to a rise in the oil price in the weeks leading up to early December. It is not widely believed to be due to any significant improvement in underlying demand.

Canaccord Genuity’s Volume Proxy index for the sector, which is based on ICIS pricing data, has shown an upward trend which is unusual for the time of year.

“The recent movement has been broad-based, with contributions from all regions and products,” says the bank’s London-based chemicals analyst, Paul Satchell.

“Europe, in particular, has shown a pronounced improvement from its November low.”

On the face of it, the Volume Proxy trend could be taken as evidence of a firm recovery in demand for basic chemicals, Satchell says, but the oil price rise in the four weeks to the beginning of December did work to push petrochemical prices up.

Purchasers tend to build defensive inventory when they expect their input prices to rise. This may have been working against the natural tendency towards the year end to de-stock.

A slightly weaker oil price in the past two weeks has coincided with a stabilisation in the index, Satchel notes.

“In spite of the superficially bullish development of the Volume Proxy so far in December, we remain cautious on basic chemicals. We remain of the view that inventory management has become the primary determinant of incremental demand movements. That in turn suggests that underlying, ‘real’ demand remains fragile at this stage, in spite of apparent improvements in macro indicators.”

And the macro indicators do look good.

Chemicals production volumes in Europe were up year on year in October for the first time in two years, Bernstein Research highlighted in a note to clients on Thursday.

US production was somewhat lower year on year and month on month and Japan was down but China reported chemicals volume growth of 14% year on year in November and an increase in the three month moving average on a month-on-month basis.

Growth in India was 8% year on year and production in Russia up 5% and Brazil up 1% on the same basis.

The analysts note that industrial production in China is accelerating after a two-year slowdown. This in turn is seen to be driving China’s chemicals demand.

“Chinese chemicals production is pro-cyclical with industrial production,” they say. “After two years of deceleration, the recent acceleration in industrial production could drive surprisingly stronger chemicals growth.”

The question is whether improvements in certain petrochemical spreads, in indicators such the inventory-to-sales ratio in the US and Germany’s IFO business assessment, which was much more positive for the sector in October, are indicative of a sustainable uptick in demand. All could, in part, be reflecting the seasonal year-end trend.

But if the uptick in 2013 came early, then perhaps there will not be the usual much stronger growth in January that indicators such as Canaccord Genuity’s Volume Proxy usually reflect.

That would particularly be the case if the oil price weakens.

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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