Petchem markets provided a perfect case study of Volatility last week, confirming the blog's view that we are heading into a VUCA world where Volatility, Uncertainty, Complexity and Ambiguity will dominate.
This was also real volatility, where prices crashed downwards and surged upwards at the same time. And it involved 2 of the 'building block' products, butadiene and benzene, not small volume derivatives.
Butadiene saw the biggest moves. The blog has lost count of the number of analysts who have suggested that prices will remain at a 'permanently high level', and even justify on-purpose production. Instead, it appears that buyers have simply disappeared.
US butadiene contract nominations thus fell an astonishing 27% on Friday. Whilst in Europe, the June contract price fell €400/t (18%). Benzene, on the other hand, showed the risks of having low stocks in a falling market. Plant problems saw European spot prices jump 20% ($200/t).
The butadiene problem is twofold:
• Inventories are high down the value chain, as buyers bought forward when crude/feedstock prices were rising
• Now, demand is disappearing, as they fear that oil and feedstock prices will continue to weaken
As Dow's CFO Bill Weideman noted "quite a few (buyers) are holding off, I should say, to buy in anticipation of lower prices."
Benzene, as always, is highlighting the next round of problems. A sudden, 20% price increase cannot be passed on in today's market. So demand will be further reduced, creating the potential for even more volatility in the future.
UK statesman Harold Macmillan best summarised today's situation when asked in the 1960s what kept him awake at night. "Events, dear boy, events" was his reply.
None of us know what combination of political, social and economic events are ahead of us. The only certainty is that a return to the BabyBoomer-led economic supercycle between 1982-2007 is increasingly unlikely.
The chart shows benchmark price movements since the IeC Downturn Monitor''s 29 April 2011 launch, with latest ICIS pricing comments below:
Naphtha Europe (brown), down 24%. "Demand remained mediocre. The Asian market is weak, while in Europe, there has been little interest from petchems and gasoline"
PTA China (red), down 20%. "Most Asian plants have completed maintenance work in April-May. At the same time, downstream polyester demand remained slow. "
HDPE USA export (purple), down 18%. "Interest remains weak as falling crude and naptha prices have led global buyers to expect a significant price drop next month"
Brent crude oil (blue dash), down 14%
S&P 500 Index (pink), down 3%
Benzene NWE (green), up 8%. "Production problems with at least two aromatics units drove the prompt market up sharply"