CEOs start to warn on the outlook

Recessions Jun11.pngEuropean ethylene contract prices (CP) can be excellent indicators of profitability trends in the industry.

Buyers were caught short during December, as inventories had been run down for year-end reasons. So when crude prices started rising, they had to rush to cover their positions. The panic was particularly strong as most companies had set sales prices for the next 90 – 180 days.

As December progressed, buyers therefore scrambled to capture ‘low-priced’ product before it disappeared. Thus at the end of December:

• The January CP rose 10% from €1005/t to €1110/t ($1480/t)
• Brent crude oil, meanwhile, had risen $10/bbl to $95/bbl

Now, the trend is reversing. Buyers are trying to reduce inventories as they expect lower prices and slow demand during the summer months.

• The July CP has just been settled down 8% at €1090 ($1450/t)
• Brent, however, has only fallen (so far) to $110/bbl

As the chart shows, a US recession (shaded area) has followed every time oil prices were above $50/bbl in real terms ($2011, red line).

Now, companies have begun to issue profit warnings. AkzoNobel, the global paint and chemical company, was the first. It told investors this week that it had been unable to pass through higher prices to its customers, and added that demand remained weak.

Chemical company CEOs will now be planning their half-year reports. In Q2, only Peter Huntsman took the opportunity to remind investors of the threat from “high oil prices, unemployment and economic fragility“. Others may now want to follow his lead.

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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