Petrochemical markets continue to provide plenty of warning signs about the deteriorating state of the global economy. As the above chart shows of price movements since January, even benzene is now weakening as supply disruptions fade.
The obvious conclusion is that downstream users have simply been unable to pass through recent increases. Instead, these further weaken demand.
The outlook for Q3 is therefore not very good. Players down the value chain still hold too much inventory. This was bought during crude oil's earlier upward run to $125/bbl, when players had to panic buy to protect their margins. Equally, political uncertainty in the Eurozone and China adds to the general lack of confidence.
Yet financial markets remain ever-hopeful that central banks will step in with a magic wand, and remove all their problems. Thus Wall Street rallied on Thursday and Friday, gaining 2.4%. This is understandable, as the current leadership of the US Federal Reserve continues to confuse being 'market-friendly' with being 'friendly to markets'.
Not for them the hard logic of previous chairmen such as Paul Volcker, who would put the interests of the real economy first. And this change in central bank philosophy has important implications for chemical markets and consumers. As US investment magazine Barrons notes:
"Quantitative easing is losing potency in lifting asset prices and the economy but remains just as powerful boosting commodities." And it adds, "there is a great irony about monetary policy these days: investors and politicians would like it do more and more when it is apparent it can accomplish less and less."
If central banks do resume their mistaken policies, then oil prices will almost certainly rise again, fuelled by the increased liquidity. This will further destroy demand in the real economy, even while the speculators and high-frequency traders celebrate their profits.
Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:
Naphtha Europe (brown), down 33%. "Outlook for the European market is uncertain, with petrochemical requirements for naphtha reduced in both Europe and Asia, and gasoline demand lower than in previous years"
PTA China (red), down 32%. "Polyester production cuts continued to increase in China. Around 1.7MT of capacity has been idled since early June, and another 1.5MT is to be taken off line."
HDPE USA export (purple), down 28%. " Mexico's Pemex reduced prices due to declining prices of imported material and low demand for all grades"
Brent crude oil (blue dash), down 22%
S&P 500 Index (pink), down 2%
Benzene NWE (green), up 1%. "Market appears to be easing off as imports from both Asia and the US Gulf arrive"