Chem Companies Face Funding Crisis

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By John Richardson

A collapse in the price of oil would expose petrochemicals producers, buyers and traders who have built- up stocks.

They built up inventories because oil was on the way up earlier this year.

And they were also encouraged to stock-up because of more confidence over the Eurozone, relative to Q4 last year, and the belief that China would bounce back after a disappointing 2011, as a result of stronger economic stimulus.

The US economy also looked as if it was in the midst of a reasonably strong economic recovery.

But the Eurozone is now in deeper crisis and China is slowing down far-more quickly than most people had expected.

US jobs growth in May was the slowest for a year, casting further gloom on the outlook.

Crude oil has responded. At one point last Friday, for instance, the Brent front month price fell by more than $4 a barrel.

“Ironically, a geopolitical crisis might help the chemicals industry as the price of crude would remain firm – thus enabling companies to avoid inventory losses,” said fellow blogger, Paul Hodges.

But this would only be a temporarily relief as all the signs are that expensive crude has caused demand destruction. The economy is just too weak to support the current cost of oil, and so the longer it remains as high as it is today, the more the damage.

Last week’s fall in the price of oil, and with it petrochemicals prices, further support the concern that companies who stocked-up in Q1 are heading towards significant losses.

Across-the-board price declines included a further 17 percent fall in US ethylene. The price of US C2s is now down by 44 percent over seven weeks.

The FOB Korea price of ethylene fell by a further $100/tonne last week, despite Taiwan’s Formosa Petrochemical Corp announcing that it had shut its No 3 naphtha cracker at Maliao in Taiwan. The 1.2m tonne/year cracker is the largest of the company’s three crackers at the site.

The weakness in Asian ethylene, of course, reflects problems downstream, which we will examine in further blog posts later this week.

And so, where do we go from here?

Small and medium-sized companies could face difficulties in obtaining working capital from banks, which will be concerned about losses on inventory.

This might occur at a time when the banks are already cutting their exposure to the smaller companies, because of the regulatory response to the 2008 crisis.

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