Financial markets may be the greenest on the planet – after all, they continuously recycle the same mistakes. Errors accumulate one atop another until we rechristen them patterns, trends, or cycles.
Periodically, we claim to have learned the lessons of the past, to have broken the old patterns, trends and cycles, but instead find newer, cleverer, bolder ways to achieve the same end result.
The “end of boom-and-bust” in reality just means a longer boom, and a deeper and harder bust – a poor man’s tribute to the Great Depression of the 1930s.
New people join markets, “new” ideas – really just disguised versions of old ones – come in, lessons are abandoned as anachronistic, and the old patterns recommence. The “lessons learned”, depend solely on the resilience of memory.
When the financial crisis hit petrochemicals markets in 2008 and demand evaporated, producers across the complex were left with too much stock and prices plummeted as a result, with the ICIS Petrochemical Index (IPEX) plunging a record 27% in December 2008.
“Never again” was the lesson at the time, and petrochemical players have broadly been rationalising stocks ever since, not wanting to be caught out for a second time if the market suffered another seismic shock.
Memories in the European acrylonitrile (ACN) market, it seems, are short. European ACN prices fell by $90-180/tonne in March because an overestimation of demand by some sellers led to a fire sale of material to relieve full tanks.
Rising spot prices in January and February on the back of global supply shortages led to an excess of confidence over March order volumes.
Some suppliers gambled that a seasonal increase in fibre demand and ongoing outages in Asia and the US would lead to higher offtake in March, and they increased inventory. The problem was that fibre demand remained flat because of lower-priced competition from cotton and polyethylene terephthalate (PET).
Coupled with this, Asian buyers reasoned that by the time material landed, local production problems would have been resolved, easing supply restrictions and potentially lowering prices, and so they were unwilling to take the risk on buying forward from abroad.
Asian buyers judged correctly, and spot prices CFR (cost and freight) northeast (NE) Asia have dropped by $100-150/tonne in the past 6 weeks – the average lead time for European product to Asia.
European spot prices stabilised the week ended 4 April, but this was more the result of player attendance at the International Petrochemical Conference (IPC), run by the American Fuel & Petrochemical Manufacturers (AFPM), in San Antonio, Texas, US, limiting activity rather than a change in supply and demand.
Much of the material sold at distressed levels was distributed to traders with free tank space, encouraged to take unrequested material by attractive pricing without necessarily having an end destination in sight.
As a result, it remains difficult to assess how much distressed material remains in Europe waiting to be sold-on and, therefore, difficult to assess how oversupplied the market is and how much further it has to fall.
The European spot price falls in March have not completely eroded spot price rises in January and February, but, more importantly for producers, spreads against feedstocks have narrowed. Spot prices are currently $30-40/tonne higher than at the start of 2014.
Nevertheless, feedstock propylene contract prices have risen by €10/tonne, which at today’s exchange rate equates to a $14/tonne rise.
The propylene contract price change, however, becomes more pronounced when factoring in US dollar/euro exchange rate movements, rising to a $40/tonne cost increase. Spot prices of ACN’s other feedstock ammonia, have risen by $60-69/tonne between the start of 2014 and 2 April.
Using the generally accepted production ratio of 1.1 tonnes of propylene and 0.5 tonnes of ammonia to 1 tonne of ACN, this represents either a feedstock cost increase of $41-46/tonne factoring out exchange rate movements, or $70-75/tonne factoring exchange rates in, meaning that in real terms, producers’ margins have shrunk since the beginning of the year.
Placing this in further context, and to fully demonstrate the disaster for producers that falling spot prices represent, 2013 saw the lowest average spread between ACN spot prices and feedstock costs since ICIS’ current ACN spot price series began in 2009.
Also remember that spot prices typically fall at year-end as players destock to lower working capital on year-end balance sheets. Between 1 November and 3 January, ACN spot prices fell by $60-80/tonne.
European ACN sellers that are not under pressure to offload material have now withdrawn to the sidelines of the market in the hope of improving margins.
The over-estimation of March demand has wiped a lot of margin off the market at a time when spot profit levels were already precarious. ACN producers have been increasingly favouring the contract market because of the difficulty in obtaining spot margins.
Given that prices of acrylic fibre alternatives have been falling and supply increasing, and that the Asian production problem timetable was foreseeable in advance, it may seem strange that some ACN sellers bet on high demand in March.
Nevertheless, given the high off-take in January and February, and returning margins following a period of extreme austerity, sellers can perhaps be forgiven for trying to maximise profits during an all-too-brief tight supply window, falling back on the maxim of “make hay while the sun shines”.
Traditionally the spring period from March to May was the peak season for demand, and from 2009 through to 2012, the highest prices of the year occurred at this time.
The real tragedy, though, is that a similar price crash happened last year, albeit driven by overseas oversupply in Asia and the US as producers returned from maintenance, coupled with falling feedstock costs in those regions. Between 15 March 2013 and 19 April 2013, ACN spot prices fell by $220-225/tonne.
For the second year in a row, spring oversupply and weak demand have led to a European spot price crash – there is a danger of this becoming a pattern, a cycle or a trend.
The lesson to be learned here is that careful inventory management and a cautious approach remain necessary. Check back at the same time next year to see if I’m writing the same article again.