What happens if prices stay unaffordable for so long, that the consumer eventually stops buying? Younger readers may not remember such a period, as it last happened in the early 1980s, before the SuperCycle began. But it looks as though they may be close to finding out.
As ever, benzene is the key indicator for this critical change of direction. The chart above mirrors that earlier this month for polyethylene. It shows weekly Brent oil prices (blue line) on the left-hand scale, and NWE benzene prices (red) on the right hand scale from January 2011:
• Oil prices rose 32% to end-April 2011; then fell 18% to year-end; rose 19% to March 2012; fell 25% to July; then rose 24% to peak at $115/bbl in September
• Benzene prices rose 20% in 6 weeks in early 2011, but couldn't hold these gains
• They then fell 40% by November, before jumping 52% in early 2012
• Since then, they have ranged between $1168/$1470, with a peak jump of 21%
The reason for this relative stability was lower operating rates on refineries and naphtha-based crackers - the main source of production. Benzene is essentially now a by-product from these plants. Gasoline and diesel demand has been hit by high prices, whilst naphtha crackers have also been at low rates.
So benzene buyers had to chase supply and pay higer prices through 2012, even though their own downstream markets were weakening. And, of course, the last thing that supports a weak market is a strong price. So last week, the inevitable happened. Following new record high US benzene prices, ICIS news reported:
"Some styrene producers may look to sell benzene to capitalise on recent record high benzene prices, in the midst of poor demand for styrene".
And this comes, of course, in October, one of the strongest months of the year for production - just before the US Thanksgiving holiday and Christmas. Clearly, today's high prices have indeed destroyed demand, just as has always happened before with oil prices at today's levels.
Worryingly, therefore, benzene may well be acting as a leading indicator for other products, as we move into the seasonally quieter part of Q4.
The chart shows benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments below:
PTA China, down 18%. "Overall operating rate of polyester fibre plants was at around 66%"
HDPE USA export, down 16%. " Global demand remained weak"
Naphtha Europe, down 15%. "Oversupply is still expected to build during the coming weeks"
Brent crude oil, down 13%
Benzene NWE, up 5%. "Quiet through most of the week as a result of poor derivative demand."
S&P 500, up 4%