Placing Faith In Politicians

By John Richardson

THE public mood of last week’s Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai was resolutely optimistic.

But in the corridors, the dining rooms and the coffee bars of the conference hotel, the mood was radically different.

Taking, as usual, the polyethylene (PE) business as a reasonable proxy for the polymers industry as a whole, everybody we spoke to had given up hope of any recovery in Q1.

The betting was that by the second half of next year, markets would have picked up as a result of a solution to the Eurozone crisis.

When asked why the Eurozone crisis would be resolved, delegates had no argument to offer other than the hope that as politicians stare into the abyss, they would be forced into effective action. As we said yesterday, quoting the poet TS Eliot, “humankind cannot bear very much reality.”

“Average European cracker operating rates were 70 per cent in October and 50-70 per cent in November with one cracker closed-down for commercial reasons in December,” said a industry observer.

“There will be no recovery in Q1, but I think that the European crisis will be sorted out later next year after it has become evident that the profligate European countries have bitten the bullet and have instigated proper austerity programmes.

“This will allow Angela Merkel to sell a rescue package for Greece etc that will fully deal with the debt problems.”

The head of olefins and polyolefins for a major European producer said that he believed H1 would be bad, but that by the second half of next year “everything will be sorted out because the politicians will have to do the right thing”.

There were persistent rumours of a delay in the start-up of a major new polyolefins facility, said a North American-based executive with a global PE producer.

If the rumours were true, and if the Euro crisis was resolved, which he believed would be the case, buying sentiment would substantially improve, he added.

Right now, in Europe and In Asia, many buyers remain firmly camped on the sidelines. Caution is the name of the game as nobody wants to be left holding high-priced inventory in the event of “too much reality” – a collapse of the Eurozone and therefore the oil price.

The China market, where pricing is still weak as the slide below from ICIS pricing illustrates, hasn’t benefited from last month’s 50 basis point cut in bank-reserve requirements, a Singapore-based polyolefins trader told us.

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“It is really, really bad out there as liquidity is still very tight. There is just no confidence as smaller converters and traders are continuing to go bust,” he told us.

He made the point, which we raised earlier on, that the “Chinese New Year excuse” is being used much earlier than usual.

“The market packed up for the New Year 2-3 weeks ago, even though it doesn’t occur until 23 January. We would normally expect business to only start winding down in early January.”

A reflection of the lack of risk appetite among overseas and domestic traders was the preference for trading on the Dalian Commodity Exchange over physical cargoes, he added.

“The Dalian contract that closes in January was recently trading at RMB8,700-9,000/tonne for film-grade linear low-density PE (LLDPE). This compared with physical prices of RMB9,300/tonne and so there is, perhaps, a mild upside potential if sentiment improves and the Dalian in response rallies.

“It is the scale of the risk that also matter, though. When bank lending was plentiful in 2010, nobody thought twice about buying local physical local cargoes, even though the requirement was and remains 100 per cent up-front cash deposits.

“On the Dalian, the margin call is only 20 per cent of the cost of each contract and so your ability to leverage is automatically five times higher.

“Plus, if you close your position on Dalian before a contract matures, as most people do, you don’t have to take physical delivery of PE that these days would be very hard to sell.

“The futures exchange is giving traders something to do, somewhere to make money, as there is so little real business out there.”

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