US Chemicals Slowdown

US PE contract pricesUSPEDomesticContractsJune28.jpgBy John Richardson

THE American Chemistry Council’s Mid-Year Situation and Outlook Report, which was released this week, helps explain the background to the weakness in demand seen in the US polyethylene (PE) market.

What goes for PE will, of course, apply to the rest of the US petrochemicals business.

In the case of PE, the blog has heard of big inventories among US producers, whereas there is a widespread belief that stocks among Chinese converters are low.

But as HSBC has pointed out, overall synthetic resin inventories among domestic and overseas traders who serve the China market remain high, meaning that the destocking cycle, which began in the first quarter of last year, continues.

So we worry that if the US attempts to raise PE exports in Q3 in order to compensate for their high stocks, including the possibility of big volumes heading to China, the end result could be a price war in a market that is more oversupplied than some people believe.

Adding to this oversupply is confirmation by our colleagues at ICIS news that the 300,000 tonne/year Qatar Petrochemical Co No3 low-density PE (LDPE) came on-stream on 20-21 June.

“In the US, the recovery of key chemistry end-use markets has been mixed,” wrote the ACC in its report.

“The manufacturing sector, which is the largest consumer of chemistry, was strong during the early part of the year. It has weakened, however, as export markets softened and because of renewed retrenchment from uncertain households and businesses.

“Despite gains in vehicles and housing, weakness in export markets and domestic manufacturing will likely limit gains in (US) chemical demand,” continued the ACC.

(The ACC expects vehicle sales to rise to 14.4 million in 2012 before increasing to a 14.7 million pace in 2013.

“Following six years of steep declines and bumping along the bottom, housing remains weak with starts expected to grow only modestly in 2012 to a 750,000 unit pace,” the report added.

“In 2013, however, housing may finally see shoots of a recovery as housing starts improve to a 920,000 unit pace.”)

“Production of chemicals, excluding pharmaceuticals, has eased as demand from both domestic and export markets have slowed. Improvements in capacity utilisation have stalled as the manufacturing sector cools,” said the report.

But in terms of overall US chemical-industry inventories, the ACC estimates that they remain “roughly in balance”, and that, therefore, an inventory correction on the scale of 2009 is not expected.

We sense, however, that in many respects we are in a similar place to late 2008, when the global economic crisis began.

Declining oil prices, and the great uncertainty over the global economy, are weighing heavily on chemicals buying patterns. Chief financial officers will want to horde capital in the current climate.

True, there has been, as yet, no sudden and cataclysmic event on the scale of Lehman Bros.

But doesn’t the Eurozone’s slow train wreck, and widespread failure to predict the degree of slowdown in China, amount to approximately the same thing?

Adding to the caution among chemical producers and buyers must be the possibility of a Lehman Bros-style shock in the Eurozone.

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