US financial markets defy gravity

D'turn 22Oct11.pngBlog readers can choose their favourite leading indicator this week.

In financial markets, the US S&P 500 index continued its recent rally. If you believe the bullish analysts; a Greek default, lengthy arguments between Germany and France, and the need to expand the Eurozone bailout fund into the €1-2trn range ($1.4-2.8trn), are all good news.

As US Fed Governor Richard Fisher noted Friday, the Fed’s new Operation Twist stumulus package has “so far been of greater benefit to traders and large monied interests than to job-creating businesses.”

Meanwhile benzene, the blog’s own favourite indicator, is now trading at the same price as naphtha – $893/t versus $888/t. This has only happened twice before in history – in the 2001 and 2008/9 downturns.

Other benchmark petchem products are giving the same message:

• In polyethylene, US producers are now planning to use their cost advantage to sell into China, due to lack of other available markets. Whilst European producers are targeting Asia, Africa and Latin America due to lack of domestic demand
• In PTA, lower paraxylene prices have led to sharp falls. China’s Zhengzhou futures market went limit down (6%) on Thursday, a clear sign of weakness. India was already slow before the Diwali holiday, whilst China’s polyester producers are lowering prices to try and capture sales

The key issue, of course, is the level of inventory down the chain. This is probably still quite high, as wholesalers and retailers built stock in H1 ahead of price rises and expected strong sales in the pre-Xmas season. This could pressure petchem/polymer volumes over the next few weeks.

In addition, today’s crude oil prices are clearly out of line with fundamentals. Supply is good, with Libya coming back already at reasonable rates. Stocks are at relatively high levels compared to more normal times. And demand is suffering due to today’s high prices.

There is thus a clear risk that oil/feedstock prices could fall quite sharply, and prompt further efforts to destock, if financial markets ever decided to move back towards reality.

ICIS pricing comments this week, and price movements since the IeC Downturn Alert launched on 29 April, are below:

Benzene NWE (green), down 32%. “Several cargoes have been booked to the USA to prevent a glut of benzene building in Europe.”
HDPE USA export (purple), down 26%. “Prices continued on a downward trend, as global demand remained weak.”
PTA China (red), down 18%. “Most market players are pessimistic as prices continue dropping amid tight credit and a slowdown in demand.”
Naphtha Europe (brown dash), down 19%. “Demand from petchems remains poor, while from gasoline is moderate”.
Brent crude oil (blue dash), down 12%.
S&P 500 Index (pink dot), down 9%.

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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