By John Richardson
ASIA’S petrochemicals traders and producers have on the whole done fantastically well over the last 20 years by sticking with tried-and-trusted ways of assessing markets.
It is very tempting, therefore, to think that today’s weak demand will soon be put right through just a few production cutbacks.
Last week, my colleagues at ICIS pricing reported the following for three of the most-important feedstocks:
- In ethylene, suppliers cautioned that some cracker operators would review their operating rates if weak market conditions for co-product propylene and its derivatives persisted – and if ethylene spot prices continued to fall.
- In benzene, 45,000 tonnes of production has already been lost due to cutbacks. This is expected to rise to 75,000 tonnes in January.
- And in paraxylene (PX), there was also talk of production cutbacks that might slightly tighten the market.
A widespread assumption is that once production cutbacks have taken place everything will, more or less, return to normal.
I have also heard another very commonly expressed view over the last few months, which is this: The collapse in oil prices will also soon be reversed by a few crude production cutbacks in the US – and eventually, even by OPEC. Pricing will then return to around $100 a barrel and will become much-less volatile.
I continue to worry that people have got this all upside down, as demand is the main problem with crude – not supply.
A further reason for complacency is that December is traditionally a quiet month in Asian petrochemicals markets as producers wind-down inventories before the end of the calendar financial year. This wind-down helps to improve their financial results.
And in January, everyone knows that China traditionally rebuilds its petrochemicals stockpiles. This restocking is expected to last longer than in 2014, given that the Chinese New Year falls much later next year (it took place on 31 January this year, but will not happen until 19 February in 2015).
But the tried and trusted no longer works in assessing petrochemicals markets.
- China is set to reshape the global economy as it undergoes its biggest set of economic reforms for at least the last 20 years.
- These reforms are now well underway – meaning that growth can only get worse rather than better next year.
- The above chart shows the declines in ethylene, benzene and PX pricing from 25 July until 5 December. In late July, the global consensus towards China shifted as people recognised that China’s leaders will not “blink”. This changed expectation has contributed to weaker crude and the declines in petrochemicals markets.
- Much-weaker crude oil prices and extreme volatility in the day-to-day price or crude are thus strong probabilities over the next few months.
- Crucially, also, I think we have entered a new global financial crisis – for all the reasons I highlighted last week.
There will be opportunities for traders to make money from this volatility. But traders will take a big risk if they stick with the tried-and-trusted ways of assessing markets.
For the producers and buyers of chemicals and polymers they, too, must reject the familiar and the comfortable. Their first task will, of course, will be to get through the new global financial crisis intact – and I worry that some won’t make it; the second task is rebuilding their entire growth strategies as the New Normal develops.
So, how should we look at markets in the future? Tomorrow, I will make some suggestions for the biggest value chain downstream of ethylene – polyethylene.