US chem index slips into bear market

HOUSTON (ICIS)–An index measuring US chemical stocks slipped into a bear market on Tuesday as worries about a slowdown in China continue to roil the industry.

The Dow Jones US Chemicals Index fell to 447.54, down nearly 21% from its 52-week high of 565.65.

On Tuesday, stock markets ended lower after a massive rally fell through.

The Dow Jones Industrial Average was up by as much as 441 points before closing at 15,666.44, down 204.91 points.

Likewise, the S&P 500 was up by nearly 55 points before closing at 1,867.62 down 25.59 points.

The sharp declines in the stock market underscore the concerns about slower growth in China.

“Everyone is so used to 7% GDP growth,” said Kevin Swift, chief economist for the American Chemistry Council (ACC). “In the long term, that is going to slow appreciably.”

China’s GDP outlook dims

Many already suspect that China’s GDP growth has slowed to 3-5%, Swift said. In 10 years, its long-term potential growth rate will likely be 3%.

China is a big chemical export market for US producers, with 2014 exports worth $13.5bn or 7% of the nation’s total, Swift said.

Likewise, US chemical imports from China reached $14.3bn in 2014, he said.

China, of course, buys and sells chemicals all over the world. If the country’s economic problems become too pronounced, the subsequent drop in demand could pressure prices worldwide. Chinese exporters could cut prices and target foreign markets as they attempt to offset weak domestic demand.

The Chinese yuan has already weakened, boosting the price advantage of the country’s exports.

In general, China is an important end market for countries dependent on commodities. The subsequent decline in Chinese demand for these products has slowed the economies in Brazil, itself an important US destination for chemicals.

Slower growth in itself will lower demand for petrochemicals. However, it could be especially harmful for US producers because it could further strengthen the dollar.

The US serves as a safe haven during times of economic trouble, and this trend strengthens the dollar. Not only does a stronger dollar make US exports less competitive, it also lowers oil prices – and petrochemical prices typically fall with oil.

China is already dragging down markets

Many of these factors converged in the Chemical Activity Barometer, an economic statistic kept by the ACC. It consists of production, equity prices, product prices, inventories and other economic statistics.

In August, the barometer fell by 0.3% from July on a three-month-moving average. The barometer rose 0.1% in July and 0.5% both in May and June.

The immediate outlook for global chemical prices is for continued declines, due to a new wave of negative sentiment and a drop in feedstock costs, said a representative in the US of a trading company based in Tokyo.

“Commodities are going lower,” he said, citing the prices of polymers in spot markets. “That seems pretty obvious, right now.”

US chemical markets react to slower Chinese growth

Already, US August polyethylene (PE) prices fell by 5 cents/lb.

For US PE producers, the problems in China outweigh lower oil prices or falling stock markets because companies need that country as an export market, a resin source said.

For polypropylene (PP), given the recent swings in the stock market, the outlook in China could become even more pessimistic, increasing price volatility for the resin, a source in Colombia said.

For US polycarbonate (PC) and acrylonitrile butadiene styrene (ABS), Asian exporters could become more aggressive, and a stronger dollar could give them an even greater cost advantage, another source said.

A distributor of oxo-alcohols – especially n-butanol (NBA) – to Asia says he is not yet struggling to find a destination for material, but he believes his business is headed for trouble unless he broadens his customer base internationally and alters his business plan to include more domestic customers.

“How long will it be bad in Asia?” he said. “There is no way to tell, but the export market is getting uncomfortable.”

Although he has limited exposure in China, with only one major customer there, he has heard from customers in southeast Asia that lower-priced material from China is readily available as an alternative to US material. He added that China could begin to dump material into the US market, but he has not seen that happen yet.

Activity in other markets have slowed because buyers are waiting for prices to bottom out. This is already happening in ethylene oxide (EO), a source said. “Demand is comparatively soft as buyers fret over China’s malaise.”

A nylon trader said it was able to maintain US prices for polyamide 6,6 (PA66).

“Prices are not going up, but we have not seen them go down yet either,” the source said. “Cheaper oil might change all of that.”

A US distributor in the domestic market said that he continues to expect most US exports of commodities chemicals to continue. Even with lower crude oil prices, US producers still enjoy a production-cost advantage.

US NGLs and crude remain low

Unlike most of the world, US producers rely on natural gas liquids (NGL) instead of oil-based naphtha as a feedstock. This gave the US an enormous cost advantage when oil prices exceeded $100/bbl.

That advantage has eroded because of the decline in oil prices. However, NGL prices have also fallen, allowing the US to maintain its cost advantage, albeit at a lower level.

For the NGLs ethane and propane, a large oversupply is the biggest trend affecting the market. Recently, normal butane and natural gasoline prices fell sharply on Monday, as they were much more influenced by the drop in crude oil prices.

Most petrochemical manufacturers expect oil prices to continue falling, the distributor said. Those he talked to expect oil to reach $25-30/bbl by the end of the year.

That will effectively shut down oil sands production in Canada, where costs are near $60/bbl, and exploration and development of US shale fields, where costs run $45/bbl.

That scenario holds that it will take 12-18 months to work through the supply-demand imbalance and begin a rise in oil prices again.

“But it will take three to four years for the oil sands and shale field exploration and production activity to get back to 2014 levels,” he said.

US olefins, refineries respond to low oil prices

The US olefins market responded to recent downturns in crude oil with continued low prices and expectations of long supply.

US front-month ethylene traded at 23.00 cents/lb ($507/tonne), up from a trade done a day ago at 22.75 cents/lb.

Market players continue to expect a price rebound despite long supply and falling demand, as an August versus September trade was done at 0.5 cent/lb in contango.

In the propylene market, prices continue to fall, with refinery-grade propylene (RGP) dipping to 16.5 cents/lb via trade, compared with bid/offer levels on 21 August at 17.0-22.5 cents/lb.

Polymer-grade propylene price expectations were also falling, although August activity was thin as selling interest remains muted.

The outlook for oil prices will depend in part on demand from refineries.

The industry is coming off of an exceptionally busy summer season, where utilisation rates were well above 90%.

Refiners typically scale back production and conduct turnarounds during the autumn, since fuel demand typically declines. An active turnaround season could lower demand for crude, putting even more pressure on prices.

So far, gasoline inventories for the US are similar to where they were last year, according to the Energy Information Administration (EIA), with consumption about 11% higher than last year.

For the week ending 14 August, jet fuel inventories are about 18% higher than the same week last year, and jet fuel consumption is 23% higher than the same time last year.

Nonetheless, NYMEX futures prices fell to multi-year lows for heating oil and reformulated blendstock for oxygenate blending (RBOB), the basis of jet-fuel and gasoline wholesale prices.

Additional reporting by Bill Bowen, Bobbie Clark, Tracy Dang, John Dietrich, Annalise Little, Larry Terry and Marianela Toledo

Focus article by Al Greenwood