Inventories And Price Recoveries

By John Richardson

THE role of inventory management in European petrochemical price recoveries needs to be re-examined, given persistently weak underlying economic fundamentals.

In Europe, as this ICIS Insight article from my colleague Mark Victory points out, benzene contract prices have risen by 40%, propylene contracts have increased by 20% and ethylene contract prices by 21 percent since December. And he adds that resulting price rises further downstream reflect re-stocking by end-users after the severe reduction in inventories in Q4.

The last quarter of last year was a time of severe economic gloom. The Eurozone looked set to collapse and the slowdown in China had already become apparent.

Since then, of course, the mood has improved as a result of the Greek “rescue package” (in inverted commas for a reason). It was inevitable that buyers would have had to restock because their inventories had been so severely depleted in Q4.

A further motive to boost purchases has been the increase in crude-oil prices – a repeat of the “buying forward” pattern which occurs when oil prices are on the rise. But economic growth remains fragile, particularly as the rise in oil prices is causing demand destruction. 

The extent to which restocking has also been driven by supply constraints also needs to be assessed. Deep cracker and derivative operating rate cuts in Europe in Q4 substantially tightened markets.

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