Demand Weakness Dominates



By John Richardson

A CAREFUL reading of all the major ICIS pricing reports covering olefins, polyolefins, aromatics and their derivatives over the last few weeks reveals very few mentions of the phrase “peak demand season”.

This time last year, the reports were full of references to the seasonal surge in production of finished goods in China in time for the Thanksgiving and Christmas sales seasons in the West.

The reason is obvious: In comparative terms, this year’s peak demand season has been exceptionally weak and therefore hardly worth discussing at all. 

“The container-shipping industry is contending with the longest stretch of near-zero rates in its half-century history on the Asia-to-Europe route, as a capacity glut combines with the slowest growth in trade since 2009,” wrote Bloomberg in this article published last week.

“Commerce on the world’s second-busiest container route rose 4.2 percent in the second quarter, the weakest since the end of 2009, Woking, England-based Container Trade Statistics Ltd. estimates.”

It is a similar story on the Asia-US route, of course, due to all the macro-economic problems.

In polyolefins, what seems amazing at first glance is why pricing has held up so well.

Polyethylene (PE) and polypropylene (PP) were each, for example, only assessed $10-20/tonne lower last week. As the graph below shows (click on the link), pricing has remained pretty stable in the face of what is clearly a new global recession.

AsiaPEpricingSept52011.ppt

There are two reasons for this, which are:

1.) Olefin and polyolefin supply losses in Q3 have been huge – as this slide from our latest ICIS Worldwide Ethylene Plant Report illustrates – click here: AsiaEthyleneCapacityLossSept2011.ppt. Several scheduled turnarounds in Asia are now, however, coming to an end and some technical problems look as if they are close to being resolved. For instance, Formosa Petrochemical Corp hopes to restart its 700,000 tonne/year No1 cracker at Mailiao in Taiwan during the first half of this month

2.) The oil price has yet to free-fall. But the blog agrees with Paul Hodges, UK-based chemicals consultant, when says: “I used to think that prices would eventually stall and then re-stablise at around $60 a barrel, and this is still my base case. But I think the damage that has been done to demand by high oil prices may be so great - in combination with the other economic problems emerging around the world - that we may end up back at $25 a barrel.”

We are heading for some very difficult times. 

Although the fourth quarter might be too soon for the major correction that we believe will eventually happen in crude oil, petrochemicals supply is set to lengthen not only in the olefins chain but also in paraxylene (PX) and styrene monomer.

Strong support from demand seems unlikely as the “peak demand season” is over, Q4 is traditionally a little quieter and the uncertain economic outlook is resulting in a lot of risk-aversion.

Another factor to consider when making your market-assessments for the rest of this year is  China’s decision late last month to change how bank-reserve requirements are calculated.

“This is already making trade finance a lot harder to obtain,” a Singapore-based polyolefins trader told us late last week.

The policy involves banks being forced to include “margin deposits”, or collateral deposited by customers for letters of credit and other guarantees, in calculating the share of deposits they must put aside for reserves, according to the Wall Street Journal.

The move would “seriously cut off” traders’ access to short-term credit, affecting 50-60 per cent of China’s commodity traders, Henry Liu, head of commodities research at Mirae Asset Securities, was quoted as saying in the same newspaper.

Small and medium-sized enterprises were already struggling to obtain credit because of previous attempts by China to tackle inflation.

The West has looked to Asia to support growth since late 2008, but now the prospects for growth everywhere look bad.

A case in point is the PE market.

“The overriding sentiment in the European PE market this week is one of uncertainty over demand in the coming weeks,” wrote our European polyolefins editor Linda Naylor in her latest report, published last Friday.

“Few doubt that Asia will continue to soak up volumes and many players look to Asia for direction in the mid-to-long term.”

The Singapore-located trader we quoted above, however, also told us: ”Traders are now looking to re-export Middle East from China to Europe because they have overestimated the strength of demand in China.”

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