Seeing Through The Smokescreens



By John Richardson

CHEMICALS traders and the financial community, quite obviously, benefit enormously from volatility.

Thus we have seen certain chemicals markets being talked-up by the trading community on the basis that the post-Lunar New Year period will see a surge in demand.

Equally, the job of the financial community at the moment is to sell a story to investors about a rise in chemicals prices being translated into a strong recovery in sector-specific stocks.

But the job of chemicals companies, as we discussed last Friday, should be to see through all the smokescreens and come up with realistic scenarios for the rest of this year, not just the next few weeks.

We hope what follows helps, and we apologise in advance if this seems repetitive – BUT THESE ISSUES ARE JUST TOO IMPORTANT AT THE MOMENT FOR US TO NEGLECT.

One thing that should worry chemicals companies is that in the polyethylene (PE) market – and perhaps in other chemicals and polymer markets – they have reportedly lacked the ability to push-through price increases to compensate for weak margins.

The reason is that demand for imported material has fallen, as a large percentage of imports are re-exported as finished goods. China’s export trade has, of course, suffered because of what’s happening in the West. PE markets are, as result, much more driven by the domestic final consumer.

Any “surge” in post Lunar-New Year demand might be substantially because factories have been shut down for longer than is usual due to weak export trade. For instance, small and medium-sized tyre factories closed for 2-3 weeks rather than the usual 5-7 days, according to ICIS news. We have heard anecdotal reports of the same extended shutdowns taking place in many manufacturing sectors.

In the short term, the power of overseas PE producers appears to have increased as a result of the outage at the Al-Jubail complex in Saudi Arabia. February offers have been withdrawn, and no doubt will be revised upwards, as a power failure is expected to keep the complex down for several days.

There is also talk right now about the market returning from the Lunar New Year just as the Asian cracker turnaround season gets into full swing. March production losses are said to represent the peak of the season.

But a glance at the ICIS shutdown schedule for 2012 (see chart below) shows that shutdowns are evenly spread throughout the year. And crucially, 50 percent less ethylene production is expected to be lost this year compared with 2011 as a result of fewer crackers being shut down.

 

Presentation1.jpgFurther, new plants in the Middle East are being commissioned in H1.

Demand is the thing, real, sustainable demand – and in China right now there are no guarantees that 2012 demand will be any better than 2011

We find it ironic is that the worst the manufacturing sector in China becomes the more stock markets – and in parallel the Dalian Commodity Exchange – rise on the assumption that China’s government will be forced to more aggressively ease bank-lending conditions.

A case in point was last week’s release of the preliminary January purchasing manager’s index, showing a contraction for the third month in a row. As we have discussed many times, however, and we talked about again last Friday, Beijing’s options for easing liquidity seem to be extremely limited.

And finally, what about oil prices and their impact on global GDP (gross domestic product) growth?

“The issue is simple. The world has never before had to live with Brent prices at over $100/bbl ($2012) for so long,” wrote fellow blogger Paul Hodges in this post on Friday.

“Demand destruction is clearly taking place on a wider and wider scale. Even if prices fell sharply tomorrow, demand would now still take a long time to recover.”

For the European integrated polyolefins industry, it is about managing supply in order to recover lost margins resulting from high crude prices – and also a volatile Euro.

A triple digit increase in the February ethylene contract price is therefore now expected as a result of management of supply in the face of persistently poor demand prospects, again according to ICIS news. 

We suspect this is the case up and down many commodity chemicals chains. 

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