Confidence Is Often Relative

Business, China, Company Strategy, Economics, Europe, Japan, South Korea, Taiwan

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.

PREVIOUS POST

More PTA for India

27/01/2012

By Malini Hariharan India trails far behind China in the polyester business but ...

Learn more
NEXT POST

Doing More With Less - The Products Of The Future

31/01/2012

THE global economy is moving into a difficult period, as it transitions to ...

Learn more
More posts
Making all the stuff the world needs in sustainable ways is our defining challenge
28/02/2021

By John Richardson YOU ARE a global petrochemicals producer either headquartered in Europe or with m...

Read
China’s petchems market rally: we don’t have enough data to decide whether it is sustainable
25/02/2021

By John Richardson CHINA’S PETROCHEMICAL prices typically increase when the Lunar New Year (LNY) h...

Read
China PX imports could fall by 64% in 2021 with styrene imports 59% lower
23/02/2021

By John Richardson AS OF yesterday, around 70% of US paraxylene capacity was offline. No less than 6...

Read
China’s PP imports in 2021 could fall by as much as 53% over last year
21/02/2021

By John Richardson TODAY I get closer to completing my outlooks for China’s petrochemical and poly...

Read
China slowdown may be the biggest petchem event in H1, not US and European tight supply
18/02/2021

By John Richardson I SUSPECT that the bigger story for the global petrochemicals industry in H1 may ...

Read
China’s ethylene glycols imports could decline by 45% in 2021
16/02/2021

By John Richardson LET ME start with the good news first. As with the global polyethylene (PE) and p...

Read
China’s polyethylene imports set to remain very strong in 2021
14/02/2021

By John Richardson DEMAND, as I discussed on 11 February, will not be a problem for the global polye...

Read
Petrochemicals and demand: a deer caught in the headlights
11/02/2021

By John Richardson THE THING is, as I discussed in my 9 February blog post, we simply do not have ou...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more