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Chemicals Demand Is Not Going To Return To Normal

Aromatics, China, Company Strategy, Economics, Europe, Fibre Intermediates, Olefins, US
By John Richardson on 01-Dec-2014


By John Richardson

EUROPEAN cracker operators are rushing to snap-up naphtha prices before prices rise again, reports my colleague Nigel Davis, in another of his excellent Insight articles.

“The lower crude price seems to be driving downstream demand. Europe’s crackers are said to be running flat out,” adds Nigel, who has tapped into the market intelligence gleaned from the, literally, thousands of discussions that our ICIS pricing team holds with the European industry every week.

Similarly, he accurately reports from Asia that “sellers say that MEG [mono-ethylene glycol] fundamentals are still good and that they expect the market to  [somehow] revert to a more stable state once the effect of falling crude prices has passed.”

But in a special series of blog posts over the rest of this week, I will explain in detail why I think that anyone who goes “long” on any feedstock or chemicals in any region risks adding to the financial stress exerted on her or his company. We have gone beyond a very important turning point, just as was the case in September 2008.

In summary, today, however, as there is no time to waste because events are moving,  please print out the following and pin it either on your work station, office or  boardroom wall:

  • Oil, naphtha and chemicals prices have a lot further to fall.
  • Demand will not come back in the New Year in the way that many people still seem to expect. This is not just an oil-price driven destocking process.

Tomorrow, focusing on the key China market, I shall examine why government researchers announced last week that $6.8 trillion of investment has been wasted since 2009.

I shall consider what this very public admission about the scale of China’s over-investment crisis means for chemicals demand-growth prospects in 2015.

And then on Wednesday, I will look at Europe and the risks of European crackers running “flat out”. Where will the demand come from in 2015 to justify this?

The focus on Thursday will be on the US recovery. The US alone cannot carry the global economy anymore and, anyway, the data tells us that the US recovery is not all that it at first seems.

Finally, on Friday, I will pull all these strands together in order to explain who collectively, or individually, they have already amounted to the next “Lehman Bros” moment.

Anyone who remembers September 2008 will be familiar with the term “rush to the exits” in financial markets.

I will explain how on this occasion, the corporate bond-market exits are likely to be blocked, resulting in a fire sale of all asset classes including “blue-chip” equities.