By John Richardson

THERE ARE sadly no business as usual scenarios, in my view. Under normal circumstances with the collapse of oil prices, the European and Asian naphtha cracker players would be in a position to come roaring back.

The above chart shows how, on a variable cost basis in HDPE (and it’s the same story in LDPE and LLDPE), the US is either close to or has already lost its advantage over Asia and Europe. We don’t produce a margin series for the Middle East, but the Middle East will have also lost huge ground versus the naphtha crackers.

This has major implications for the PE industry over the long term as the collapse of oil prices, which I believe is here to stay, has badly undermined the position of US investments that were built around the idea that crude would remain around at least $50/bbl.

But more immediately, the readjustment of the landscape in favour of the liquids-cracker players depends on some kind of return to usual demand patterns, and I don’t see this happening:

  • In the critical China market for the Asian producers eager to seize more market share, there is no guarantee of a strong H2 recovery, for the reasons I flagged up on Monday. An additional concern is the quality of official data emerging from China. This is always a problem, but, right now, it seems to be more of a problem than usual.
  • The rise of European margins to above the level of US margins for the first time since at least 2014, on paper gives the European players an opportunity to better defend their home market against US imports. But what kind of demand will be left to defend given the pace at which the virus is spreading in Europe?

I worry that least in Q2, there will be a destocking process that will damage apparent demand and thus the opportunity for the naphtha cracker players to make gains. PE and other petrochemical producers and buyers have stocked up on the basis of crude remaining at $50l/bb.

They will soon need to destock with crude likely to remain where it is today – and quite possibly declining all to $10/bbl or below.Even if production cuts occur, the extent of oversupply would overwhelm their effect

This will come on top of what I fear will be a slowdown in panic buying of food and other essentials now that many people have stocked up for quarantine. Increasing government restrictions on the daily or weekly volumes people can buy could act as a further destocking influence on packaging materials made from PE, PP and PET.

When you dig deeper into our margins data as the slide below illustrates, you find that the declines in PE prices has been lower relative to the fall in co-product credits.

This tells us that stocking up on food etc. has supported PE. But in the co-products that go into durable goods production, such as benzene into styrene that makes PS and ABS for electronics and autos and butadiene that makes synthetic rubber that used to make tyres, prices relative to naphtha costs have literally cratered.

What I think will happen next for the liquids crackers is a destocking process in PE with destocking further damaging returns from co-product credits. Meanwhile, apparent demand will collapse, making the margin advantage for the naphtha cracker players pretty much irrelevant in Q2.

Nothing is working as normal. What happens next – how markets have changed for good – will be the subject of future posts.

Please, please be careful out there.

 

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