Tougher sanctions set to reduce Iranian exports
Source of picture: amix.dk/blog/post/19116
By John Richardson
I met a hedge-fund manager yesterday who wanted a straight answer as to why he felt that ethylene, propylene and polyolefin margins are holding-up relatively well, despite an apparent flood of new capacity.
"The margins, particularly for polyproplyene (PP), are much better than we had expected at this stage in the cycle," he said.
Interestingly, though, the ICIS Pricing Margin assessments for ethylene and polyethylene (PE) paint a different picture. We have calculated that from Q1 this year, spot cracker margins have declined by 66% in Asia, by 50% in the US - but by only 2% in Western Europe. Logistics and feedstock availablility have kept Western Europe very tight.
But even in Asia and the US, the general margins picture - although very useful in pointing towards overall direction - doesn't deal with contract prices as opposed to spot, of course.
And for specific smaller-volume grades where tightness is great, for example, low-density PE (LDPE) extrusion grade, the story seems to be very different.
The hedge fund manager wanted simple answers in line with the history of the industry - that supply is repeatedly built way ahead of demand and that therefore, an inevitable across-the-board collapse in profitability must occur over the new few months.
On paper, yes, if you look at the nameplate capacities that have been started-up so far this year - and those still due on-stream - and measure this against likely demand-growth rates, a collapse does seem inevitable.
It is certainly true that Chinese production at new plants brought on-stream in H1 has quickly been stabilised, which is a significiant negative for supply and demand balances.
But I bored the hedge-fund manager, who I think wanted a good argument to short all petrochemical company shares, why supply constraints elsewhere might just mean that certain areas of the industry will get through this crisis without a collapse in margins to levels seen during previous downturns.
It will be about, I think, analysing companies based on their exposure to particular products. For example, anyone heavily into LDPE in general and linear-low density PE (LLDPE) - for reasons we have already given on this blog many times before over the last year - might well ride out this crisis without major pain.
But PLEASE - there is a major caveat here: This all depends on no double-dip global economic recession. My good friend and fellow blogger Paul Hodges remains firmly of the view that there is a major risk of a double dip. His views are worth listening to and building into scenario plannning.
In a conversation with an industry observer today, the blog picked up some further perspectives on why history may not repeat itself on this occasion (and even if the margins collapse to previous levels, it seems likely that the explanation will be demand rather than supply-driven).
In his own words, this is what the industry observer told us:
"We need to re-examine our assumptions and maybe lower effective available capacity from Saudi Arabia and Iran.
"In Saudi Arabia's case it's the long-standing gas supply issues and in Iran, I think the likely problems with catalyst supply, and the other implications of trade sanctions, are likely to severely curtail their ability to export polyolefins in the coming months.
"Tougher sanctions mean catalyst supplies from the West are going to a major problem."
"So the options for the Iranians will be to attempt to get other catalysts via Russia and China. This could clearly affect the stability and quality of production.
"The other major impact will increasingly be on the ability of Iran to finance trade. I suspect that the Europeans are going to be a lot more rigid about this, but less so China - but obviously China will remain firmly in the driver's seat in terms of being able to bargain-down the price of Iranian material, as Iran has far fewer other options.
"As for the ethylene spot market, I think Iran is also going to find it much more difficult to place cargoes. Exports to Europe will definitely be out, but maybe Southeast and Northeast Asian buyers will be a little more flexible in getting round the restrictions.
"The downtrend has clearly arrived, but it is not the cataclysmic shock from new supply that everyone had expected.
"It is becoming increasingly feasible to imagine, provided there is no double-dip global economic recession that certain sectors of the industry will continue to do OK right through this down cycle.
"Low-density polyethylene (LDPE) is likely to remain tight because insufficient capacity has been built - and the butene-1 issue limiting linear-low density PE (LLDPE) production is not going to go away.
"If you are integrated from naphtha through to PP then you are doing quite well, but anyone buying-in propylene is struggling because of the long-term issues over C3s availability. The lack of propylene affordability is helping to support the PP market because it is limiting the operating rates of the stand-alone PP producers.
"Propylene and C4s availability have passed tipping points and so there is a need for a very hard look at more on-purpose production."