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Waiting for the dead cat to bounce

Aromatics, Australia, China, Fibre Intermediates, Markets, Olefins, Polyolefins
By John Richardson on 17-Dec-2008

Is my colleague in London a cat lover? I am, but did not take offence at the analogy.

If I knew when chemicals prices were going to rebound, I would tell you – but only for some hefty fees.

By Nigel Davis
LONDON (ICIS news)–Beware the ‘dead cat bounce’. Global chemical market intelligence service ICIS pricing editors are seeing some spot prices in Asia moving up from recent lows although contract prices remain severely depressed.
Are these the first signs that feedstock-to-product price differentials are recovering?
A dead cat bounce is a “figurative term used by traders in the finance industry to describe a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement, with the connotation that the rise was not an indication of improving circumstances in the fundamentals in the stock,” according to Wickipedia. It is derived from the notion that “even a dead cat will bounce if it falls from a great height”.
As with the world’s stock markets, it is too early to call the upturn with anything approaching a degree of certainty. Chemical prices globally are falling because of much weakened feedstock costs.
Oil prices this week have dipped below $50/bbl which is hardly a position from which chemicals prices might be expected to recover.
But looking beyond that, it is the global demand slowdown that is giving the worlds’ chemicals markets the jitters.
Industry economists work with real data and they have little visibility. Their forecasts make salutary reading.
The American Chemistry Council’s (ACC’s) chief economist, Kevin Swift, for instance this week told the New York Society of Security Analysts (NYSSA) that chemicals production in the US could fall by as much as 5.7% next year. This is a forecast for the sector excluding pharmaceuticals.
In the ACC’s 2008-year end analysis and outlook Swift notes that forecasting now involves considerable uncertainty.
The general consensus, however, is that recession is spreading across the globe and this is affecting the business of chemistry worldwide.
“Global business of chemistry growth has essentially stalled since earlier in the year, with outright decline in the developed nations and slowing growth in most developing nations,” the ACC’s report says.
“As a result, global output will moderate significantly in 2008 and will further slow in 2009 before a recovery emerges in 2010. For the business of chemistry in the US the recession will adversely affect demand into 2009, resulting in lower production volumes.”
Other sector economists point to slowed growth in the US and a sharp slowdown in Europe, Japan and elsewhere. The outlook is hardly bright, whichever way you look at it.
Analysts have continued to talk about the lack of visibility for the sector which is battling the demand slowdown, or rather consumer disinterest, against the backdrop of lower feedstock and product prices.
Demand has all but ground to a halt in December across great swathes of the sector. The (multi) million dollar question is when will it return.
Producers widely believe that demand will return once price/feedstock cost ratios have stabilised. There will be a new floor from which producer might expect to see greater interest in their products and from which they could hope to drive prices higher.
But we have yet to find the floor in relation to feedstock costs. And the chemical industry’s customers themselves are not exactly overwhelmed with new orders.
The situation could change but is unlikely to do so rapidly and certainly not before the start of the New Year.
Swift suggests that the indicators for the US economy will become more negative as consumers retrench, sales fall, inventories rise, and production falls, which is hardly good news for chemicals.
A similar patter of reduced payrolls, mderating incomes and a “viscoious self-reionforcing cycle” is seen across other major global economies.
It pays to look forward, certainly, but it is too early yet to be overly optimistic. “Things will get worse before they get better,” Swift says in his latest ACC report, “but eventually they will get better when confidence returns”.