Lanxess temporarily closes plants, as demand remains slow

Brent Mar13.pngChemical markets continue to paint a very worrying picture of the state of the global economy. There has been no improvement in demand over the past week, since the blog first raised the alarm. Instead, plants are being temporarily closed because of the slowdown. Lanxess, for example, announced the closure of two plants in Belgium and the US, saying:

“Soft underlying demand in the second half of 2012 has continued into 2013 across most businesses, against the usual seasonal trend”

The blog has been in the industry since 1978 and it can’t ever remember plants closing for lack of demand in March. Normally, this is one of the 4 strongest months in the year.

The news came, of course, in a week when the US Dow Jones Index hit an all-time record high. In the past, financial markets were often good indicators for the economy. But they have lost this role in recent years as central banks have mistakenly tried to pump up prices via liquidity programmes, in the belief this would support the real economy.

Instead today, as a result of these policies, no single market knows what it is pricing. So if and when financial markets finally realise that the real economy is back in recession, the upset could be considerable. It is therefore critical that management teams now develop a detailed contingency plan in case the following downside scenario emerges, perhaps as soon as Q2:

• Demand remains very slow, and producers cannot pass through today’s higher crude oil prices
• Consumers have no need for spot purchases, and find it difficult to take their contract volumes
• More temporary plant closures start to occur
• Financial markets start to panic, as they realise today’s record levels have no relation to reality
• Oil prices suddenly appear grossly over-valued
• Finance directors worry about working capital exposure and try to reduce inventories
• Declining oil prices add to this trend, as companies destock down the value chain

The chart highlights the risks, using BP price data. This shows oil prices in $2012 money (green) are at levels only seen during the OPEC crises, and in the early 1860s when exploration began. In view of its importance, the blog will return to this subject on Wednesday, and look in more detail at oil market developments in China and Europe since 2008.

Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, and latest ICIS pricing comments are below:
Naphtha Europe, down 16%. “Gasoline demand is still reasonable for certain grades but petchem demand is again limited”
PTA China, down 16%. “The market outlook remains largely bearish”
Brent crude oil, down 11%
HDPE USA export, down 10%. “Some older product, purchased at lower December price levels is appearing in the market and causing global buyers to anticipate lower prices”
Benzene NWE, down 3%. “Market started to soften as Asia saw a sharp drop in pricing, which was subsequently reflected in the US as well”
S&P 500 stock market index, up 14%

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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