By John Richardson
THE mood in European ethylene and polyethylene (PE) markets has changed over the last two weeks, according to my ICIS pricing colleagues, Nel Weddle and Linda Naylor.
"A drop in crude oil and naphtha values saw speculation over a decrease for the May (ethylene) contract build this week," wrote Nel last Friday.
"This would buck the uptrend of the past four months. Soft derivative demand has long been a concern, but this has increased over the past couple of weeks amid reports of building inventories and cheaper imports from overseas."
She stressed, however, that volatility in crude and naphtha markets meant that some cracker operators felt a decrease would be difficult. In addition, the producers were anxious to protect margins that, while improving since January, still remained low.
"Polyethylene (PE) prices are being settled up on most grades in April, but the mood has changed significantly," added Linda.
"Just as the market believed that February and March prices would increase, and buyers continued to buy, now, in April, market sentiment is for May pricing to decrease, or at most stabilise, so buyers are destocking and buying only what they need."
Should we be surprised? Definitely not, as the European "recovery" across most petrochemicals was relative to a very weak fourth quarter.
Inventories among the converters were stripped to a bare minimum during Q4 as fears grew that the Eurozone would collapse.
Cracker operators responded by cutting operating rates to 70-75 percent.
Tighter supply, rising crude prices and confidence that the worst of the Eurozone crisis was behind us combined to drive inventory rebuilding during the first quarter.
Now the high PE prices have attracted more imports, which will have acted as some compensation for the exceptionally weak China market.
Uncertainty over the direction of crude has also increased, given confusing economic data. In terms of supply, however, there is a growing belief that it is ample - and that is only the Iranian "fear factor" that has enabled the speculators to drive-up the price. Iran is now seemingly ready to do a deal with the West.
Demand destruction caused by expensive crude is another issue.
But most importantly of all is the Eurozone crisis.
The European Central Bank's injection of around Euros1 trillion into the banking system in December and March merely improved the short-term sentiment.
This is a complex crisis that is going to take years to resolve.
Take the Spanish housing market as one just example of the complexity and depth of this crisis. Some Euros663bn of mortgages are at risk of default.
There is also politics. Austerity has led to a rise in politicians, some of the extreme left of or right, who are questioning the German-driven efforts to solve Europe's problems.
As for the petrochemicals industry, it is trapped in a constant cycle of cost reductions, and the frequent need to cut operating rates, in order to manage weak long-term European demand. A few months of restocking, as the first quarter has demonstrated, doesn't represent a real recovery.
A New Normal way of thinking will help, we believe.