Benzene hits a floor

Regular readers of the blog will know that it believes price movements in benzene have great predictive power. This is due to the fact that benzene is one of the oldest of the major chemicals, and has the widest industrial usage. Thus in March, when benzene prices hit a “ceiling”, the blog noted this was indicating “that the outlook for commodity petchem profitability has also weakened”.

Now, benzene is giving us another clear signal. Today’s actual crude price is close to $50/bbl. Yet benzene’s current $250/t price implies a crude price of $16/bbl (assuming the usual formulae of an $80/t conversion margin to naphtha, which in turn should be 10 times the crude price). And although anything is possible in today’s markets, it is highly unlikely that OPEC would allow a $16/bbl price to continue on more than a temporary basis, unless we are entering a massive global slump.

Today’s benzene prices are therefore giving us another clear message. Producers are selling on a firesale basis, because they have to clear inventory, in order to meet year-end cash targets. Last March, benzene was telling us that profitability was about to hit a ceiling. Now it is telling us that we are getting close to the floor.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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