Financial Sector Fear Looms Large

By John Richardson

WE will explore the following issues in a lot more detail over the coming days, assuming that the crude and financial market turmoil continues.

But for now here follows the interpretation of the crisis from a source with a major polyethylene (PE) producer.

The themes are consistent with what we have been picking up from numerous conversations at APIC and this week.

In summary, here, and as I said we will give you more details later, this crisis is financial-sector driven and doesn’t reflect the strength of growth in Asia – which has been very good. The US has also enjoyed a moderate recovery.

But if confidence goes, and the financial-sector fear spreads to the wider economy, then there could be a new global recession.

But to talk about collapsing chemicals demand is far too premature. Prices have so far corrected on lower and increasingly volatile crude oil as inventories are re-adjusted.

Enough – I am getting carried away!

In his words, our source told us last night:

The European market remains tight because of outages and operating-rate discipline. Overall cracker op rates remain at around 80% and the tight market means that price rises to compensate for higher dollar-based feedstock costs are being pushed through. For example, Dow has announced (an attempt at) a Euros70/tonne PE price rise.

“Demand is weak in Europe, but this hasn’t changed from a few weeks ago – we have known that to be the case for a long time. And with about 50% of the Euro zone economies dependent on government spending we always knew that cutbacks would have to happen in H2. What is new is the extent of these cutbacks.

“But the outlook for the US and for Asia hasn’t changed in the last few weeks. Some people are characterising the price falls as price collapses, but that’s not the case.

“In the US, ethylene had long been over-priced on on reduced production and so the steep price falls were inevitable as outages came to an end.

“And similarly, the falls in US PE are in line with what we had expected. I think there will be a further 6 cents/lb contract-price reduction in May.

“But the overall US economy remains on a moderate recovery path. I expect the numbers indicating recovery to moderate in H2, but this is going to be partly due to year-on-year comparisons – i.e. the economy began to pick-up in the second half of last year.

“However, I agree that the housing and employment markets will remain big problems, but until the Euro crisis erupted, there was greater confidence out there. This had translated into stronger sales right down all the US chemicals and polymers value chains, and therefore increased production for the industry.

“By using the past tense above I don’t mean to say that the situation has definitely changed, but rather the mood music has shifted thanks to the financial markets. Whether this will have an effect on real demand we will have to wait and see, but the longer this financial crisis goes on, of course, the greater the danger.

“As for China, we are certainly seeing a lot of panicky unwinding of PE by traders. For a long time they were able to hold inventories at no risk because of ample liquidity, low interest rates and stable or rising oil prices.

“This price correction in China is the result of the oil price and traders panicking, but again it’s too early to say that it will affect fundamental demand.

“I am not surprised at all that the Chinese government is giving indications that it will not withdraw stimulus anytime soon. It is not going to be rushed into anything.

The high PE inventory levels in China could well be the result of material imported in November-December when prices were low.”

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