Filtering Out The Noise

NEASEAmarginsFeb19.pngBy John Richardson

ONE should be careful about reading too much into the above margins for February as, of course, there was very little trading activity because of Chinese New Year (CNY), whilst oil and therefore naphtha prices increased.

But the poor performances in December and January in Southeast and Northeast Asia, despite the rally in global equity and commodity markets, suggest that the real economy has yet to fully reflect the new “risk on” sentiment.

Middle East and US producers will have made good or very good money in January-December as a result of their feedstock advantages. They always do. 

But in a genuinely tight market the higher cost producers benefit as well, which is why the above chart is significant.

This week will be crucial as activity picks up post-CNY. Improvements in pricing, along with perhaps margins, seem likely as there is often a post-holiday bounce.

But we worry that:

*The weak performance in December-January occurred despite a big loss of PE production due to turnarounds and outages. This indicates that demand was lower than the financial markets want us to believe. PE production is expected to be 1.5m tonnes higher in 2013 compared with last year as turnarounds and outages end and new capacity comes on-stream.

*Post-CNY, China’s small and medium-sized enterprises (SMEs) could struggle to ramp-up production as a result of labour shortages.

*The SMEs are likely to have to accede to demands for higher wages in an attempt to relieve labour shortages. This will further squeeze their margins, which are already under pressure from more expensive oil and therefore fuel and resin prices.

It will take a while to put any post-CNY markets recovery into the proper context.

Proper context is crucial because influential people have put an awful lot of money, and their reputations, into the notion that we have entered a sustained recovery. They will, as a result, keep making a great deal of noise about how everything is back on track.

We suggest noise reduction headphones.

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