Commentary: Difficult months ahead

Spot and contract petrochemical prices have moved down sharply, primarily in response to last month’s oil price movements. Margins have been moving violently too, particularly in Asia, with lower feedstock costs shifting relative profitability and putting intense pressure on anyone who has to determine where markets go next.

The price trend is downward, as has been apparent for some time, but the extent of the swings in crude in August highlighted global petrochemical market volatility.

Average spot petrochemical prices in northeast Asia in August were a lot lower than in July. The average ethylene price was down 23% from July and the average butadiene price down 22%. Benzene was down 17% and styrene down 16%. The lower feedstock costs were being passed on downstream to the major polymers to a lesser extent.

These prices could bounce back, of course, but demand is not great and commodity and financial market insecurity is reflected widely across the chemicals business. Demand for some products and polymers is stronger than for others, depending on end-use application, but overcapacity looms over some petrochemical markets in the region.

The ICIS Petrochemical Index for northeast Asia, which represents prices for a basket of 12 petrochemicals, weighted by capacity, was 13% lower last month than in July – when it had fallen 7% from June.

What was surprising in the August price data was the breadth of the downward price pressure, regionally as well as by product. August US ethylene prices were agreed at the start of September at a level not seen since December 2008. Ethylene is long in the US even before significant new volumes of ethane cracking capacity come on stream over the next few years as planned.

Fluctuations in olefins supply this year in Asia, Europe and the US, driven by planned and unplanned outages, have helped buoy the fortunes of petrochemical makers. But it is questionable how long these players can continue to flourish against the backdrop of what is widely considered to be a long-term low price environment.

There are alternative scenarios, of course, of which anyone involved in chemicals must make themselves aware.

Take the curious case of propylene in Europe. Cracker operators are running hard to provide ethylene for the polymers and other markets. They were accused earlier this year of allowing ethylene supply to tighten artificially to the discomfort of downstream customers and markets.

Propylene has been exported from the US to Europe. Oversupply has driven European prices down dramatically while ethylene has remained tight.

The European contract price has been higher than prices in the US and in Asia.

Oil price weakness challenges petrochemical prices even in pockets of tight supply and in a much lower naphtha feedstock cost environment. John Richardson, author of the ICIS Asian Chemical Connections blog, puts forward the (strong) arguments for potentially lower ethylene margins and cracker operator profitability in northeast Asia for the remainder of this year.

So much depends on the oil price, of course, and the factors that might move (crude oil) prices lower for longer or work to push them to a higher level.

Short-term fluctuations in price are ironed out over time, but oil and chemical companies have had to put measures in place to ensure they are more resilient to greater volatility in a lower price environment.

The “fit for 50” tag has been adopted by consultants and others analysing how oil producers and refiners might fare better in a lower oil price environment.

Initially, this was not suggesting that oil would track down to $50/bbl but pointing to a longer-term average in which crude and refined product prices and subsequently earnings would fall. Costs would have to come down to match the new oil price environment. For the oil majors, they have already done so.

It has been a year since oil, refined products and subsequently petrochemical prices began to track sharply downward. Price movements in August this year suggested that prices could go lower still or fluctuate around a level at which it is even more difficult to manage costs and produce decent margins.

Chemical producers have to be fit for 50 at least. Brent crude was trading at $49/bbl on 9 September.