By John Richardson
THE majority of financial analysts seem to be clinging on to the hope that the recovery in petrochemicals demand from China is about to happen.
This doesn't just apply to our industry. Analysts across many sectors appear to have staked their reputations on a return to the Old Normal of booming commodity markets, rising share prices and strong company results.
"Among the 9,015 analyst recommendations on S&P 500 stocks, only 300 -- or 3.3% -- are to sell, according to data provider FactSet," said an Associated Press article, which we quoted yesterday.
"That's the same proportion as a month ago, when the economy was considered to be in better shape. All else being equal, you want to sell if you think profit growth could slow."
Wall Street believed that weak petrochemical pricing in Asia (which, of course, is driven by China) was merely a reflection of destocking, a US-based industry observer told the blog.
"We keep being told that the inventory run-down process will end next week," he added.
This is consistent with what we hear from our other contacts. We were first told that the rebound would happen in May, then in early June, then mid-June, followed by end-June and early July. "The end of July" was the story told to one of our ICIS pricing editors late last week as pricing in Asia continued to fall.
"Sell-side analysts and some industry commentators project supply, demand and operating rates as a function of GDP forecasts times the multiplier," continued the industry observer we quoted above.
"With banks and the IMF constantly reducing year-end and Q2 GDP forecasts you would assume sell-side analysts will be the next to follow.
"However, given their stubborn nature I would assume they will keep praying for the ramp-up in demand."
US olefin and polyolefin producers could be clinging-on to a similar sense of denial. This is despite mounting evidence that pricing in the States will be dragged-down by what is happening in China.
China pricing led the world in 2009-2010, thanks to the country's enormous economic stimulus package.
Now that fiscal tightening has become essential as a result of inflation, the China price has been lagging both the US and Europe (we will take a close look at Europe in a later post).
European and US producers have shown exceptional operating-rate discipline since the 2008 global financial crisis. Production in Europe has been further constrained by a shortage of naphtha feedstock.
A high number of force majeures have also helped to keep Western markets very tight. For instance, 11% of US ethylene capacity was offline in April, added our industry observer.
Now, though, US ethylene supply problems look as if they are easing in this climate of weak demand.
"With no announced turnarounds, and no obvious operational issues, a (further) decrease in spot pricing is in the offing, one source said," wrote William Lemos, our US ICIS pricing olefins editor in an article on Monday.
Spot ethylene had already fallen by an average of 1% for the week ending 17 June, resulting in a 1.4% contraction in margins, Lemos added.
"The only thing sustaining (US PE) prices is the spot ethylene market," another source told Michelle Klump, our US polyolefins editor, in this article from last week.
Some US PE producers were still attempting to achieve contract price increases for June, she added.
But these efforts were occurring following a rollover of a 5 cent\lb increase into June from May.
Domestic demand was relatively weak with producers facing added pressure from lower Asian and Middle East producers, the article continued.
"US PE markets have been very tight recently, due to production problems," our fellow blogger, Paul Hodges, told us. His latest IeC Downturn Alert post said that US Gulf high-density PE (HDPE) export prices were 18% higher since January.
"China's PE demand seems to be declining - down 1.6% in Q1, and Q2 may be worse. So I think it will be very hard for US companies to maintain margins into Q3, assuming their plants are back online,"he added.
We are at a turning point in the global economy, the blog believes, as stimulus-led growth peters out and we enter the New Normal.
This should be frightening and challenging, but not necessarily depressing provided chemical and other companies adopt the right strategies.
Our new e-book, Boom Gloom and the New Normal, outlines our ideas for helping to shape these strategies.