Commentary: Oil hits chemicals

OPEC’s decision to maintain current levels of production led to a rapid collapse in oil prices. The fundamentals of supply and demand seem to be taking effect as US shale-based production continues to blossom, and the need for the country to import decreases. OPEC members, particularly Saudi Arabia, are keen to maintain market share and are reportedly prepared to see prices continue to plummet, stabilizing at around $60/bbl.

There is a strong link between oil and many chemical prices and the impact has been swift, especially in Asian and European markets as the price graphs on our market trends pages demonstrate. Asia aromatics such as benzene, toluene, styrenics and paraxylene (PX) all fell sharply in the days following the OPEC meeting on 27 November. There were also declines in Asia isopropanol (IPA) and methyl ethyl ketone (MEK).

Price falls are being compounded by poor downstream demand. Buyers remain hesitant as they pause in anticipation of further price declines. Demand from the key China market is also lacklustre. Business confidence is declining as November purchasing manager index numbers from HSBC demonstrate. The bank said its figures signal a loss of momentum in China’s manufacturing economy.

However, some winners could emerge from the current turmoil. European crackers are reported to be working flat out, fuelled in part by growth in exports linked to the weak euro, but also to improving downstream demand. Lower oil prices will put more money into consumers’ pockets, boosting demand.

BASF, for example, is set to improve its operating profit or EBITDA (earnings before interest, tax, depreciation and amortization) even though it is itself an oil producer, according to a 2 December report by analysts at Bernstein Research. They estimate that the company could achieve a 1% net price increase as feedstock prices could fall more quickly than chemical prices. In addition, volume growth could increase EBITDA by around €140m as the lower oil price stimulates demand. AkzoNobel will also benefit from falling input costs as it is able to maintain selling prices, according to the analysts.