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Confidence Is Often Relative

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By John Richardson on 30-Jan-2012

By John Richardson

CONFIDENCE can be very relative. So, compared with late Q4 last year when global cracker and derivatives markets ground to a virtual halt, perhaps it was inevitable that January would see some kind of rebound in the industry’s mood.

Deep operating rate cuts in Northeast Asia have been a factor behind this return in confidence. In late December, Northeast Asian crackers were said by one chemicals analyst to be running at 85 percent, including most significantly some of Sinopec’s ethylene plants. If Sinopec had indeed cut back to such a level, this would represent a radical change in approach for a company that has always previously run at 100 percent, regardless of market conditions, in order to keep its customers adequately supplied.

“Rate cuts to the mid-80 percent range would give the Northeast Asians considerably market muscle as we enter the post-Lunar New Year period. Once you get below 90-92 per cent, this is when producers begin to wield control over markets,” said a senior executive with a global polyolefins producer.

Producers need a strong price recovery to regain margins that slumped very badly last year, mainly because of a very bad Q4. Polyolefins demand in China was weak from March-April. However, margins were held-up by strong butadiene and propylene co-product credits until the fourth quarter, when butadiene and propylene prices declined very sharply. High crude oil prices have added additional pressure.

This “needs must” situation could therefore be behind the apparent improved confidence among producers.

Modest pre-Lunar New Year polyethylene (PE) and polypropylene (PP) price rises are also said to be mainly the result of increased buying by local traders in China. This suggests that the traders also have a motive to “talk” up the market.

Chemicals analysts are playing their part as they talk about strong price recoveries in China, resulting from restocking and the Chinese government’s “pro-growth” approach. But while this might result in an improvement in chemical stock prices, this will not necessarily mean that their arguments stack-up.

In Asia, you need to also consider the following:

1.) The risk that hard-pressed naphtha-based crackers producers will, at the first sign of a strong price surge, rapidly increase operating rates to well above 90 percent. There is talk about a “new realism” among the Northeast Asians, but they might quickly return to the old approach of fighting to regain lost market share.

2.) Global capacity additions in the biggest of all the cracker derivatives, polyethylene (PE), are few and far between in 2012 – potentially below demand growth. But there is a substantial amount of new capacity due on-stream in Saudi Arabia in H1, and this year’s Asian cracker turnaround season is lighter than in 2011

3.) “Pro-growth” in China will also be relative to 2011, when the government was forced to drastically restrict bank lending. As we have said many times before, Beijing has very little freedom to boost liquidity anywhere close-to the misleading levels of 2009-2010. This year’s official bank lending is expected to be 5 percent higher than in 2011, but it also worth noting that most bank lending tends to take place during the first half of each year. And the export environment for manufactured goods looks set to remain weak.

In Europe, too, the cracker business benefited from deep operating rate cuts. Rates were as low as 75 percent in Q4 and have since returned to 85-90 percent, in response to stronger buying by end-users.

But in the European polyolefins business, there is no firm evidence that this stronger buying represents a real demand improvement versus restocking in anticipation of further price increases. February ethylene contract prices have been settled €99/tonne higher than in January, with propylene contracts up by €90/tonne. Attempts at further increases seem likely if the current mood persists.