All At Stake And At Sea For October

A bit like the fund managers who are anxious to keep the equities rallies going until the end of the year in order to protect bonuses, there must be a lot of petrochemicals people hoping pricing in our sector will stay equally firm.

Perhaps, though, these hopes will be more inspired by job preservation rather than fat bonuses – yet another indication of how financial-world reality has become divorced from the demand for actual stuff out there.

Apart from presenting a relentlessly upbeat face in an effort to sway sentiment, there is little any one of us can to do influence petrochemical pricing.

So anxiety is building as to exactly what will be the level of demand after the long Chinese holidays, which take place from 1-8 October.

“I am not expecting demand to fall off a cliff in Q4, as stocks are not that high, relative to the position last year,” said Paul Hodges of International eChem.

“There may be some destocking if the oil price does slip back towards $40/bbl, but really it’s a question of what happens next, now that restocking is coming to an end. 

“My view is that its not going to be ‘onwards and upwards’ in a V-shaped recovery, but a more muted outlook where the environment is characterised by  higher savings, lower consumption, and global GDP growth of perhaps 2.5% rather than the historical 3.5%.”

China’s economic stimulus will continue, but perhaps at a slower pace.

And no government in the West will be willing to jeopardise the fragile recovery – although temporary stimulus measures, such as cash-for-clunkers, are coming to an end.

In Asia we have now seen a month of falling prices in polyolefins with the declines in benzene and fibre intermediates lasting even longer.

This slide, from ICIS pricing, illustrates the point:

Presentation1.ppt 



This indicates that however confident people might feel about the overall economy, chief financial officers and traders are playing it cautious.

Chemical companies don’t want to risk high inventories in case demand falls of a cliff in late October, assuming they want to keep their jobs.

You are also likely to see similar wind-downs towards the end of the year in order to preserve cash.

De-stocking by traders in China seems to be another factor behind the recent price falls, a clear indication that the 7-8 straight months of record-high polymer and chemicals imports into China involved considerable speculation.

Operating rates new plants are also reported to be stabilising.

Polypropylene (PP) has already seen a big increase in output from the Middle East and elsewhere.

Now a wave of new polyethylene (PE) and monoethlyene (MEG) capacity is expected.

“And what’s an interesting challenge in balancing inventories for producers is that these new plants are a lot bigger,” said my colleague Malini Hariharan, India country manager for ICIS (She will soon join this blog as a full-time commentator – more details later).

“This means if that there is a sudden unanticipated correction in demand you could be left with very high stock levels.”

Asian cracker operators are talking about rate cuts in October after three months of running at 100% in many cases.

How much of the improved demand was down to re-stocking after historically high de-stocking and rate cuts in Q4 last year and the first quarter of 2009?

All should become clear very soon.



, , , , ,

Leave a Reply