How Can This Year Not Be A Let Down?



Ali Naimi, Saudi Arabia’s oil minister, suggests more oil supply could be on the way




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By John Richardson

CHEMICALS analysts at HSBC have added further weight to the argument that 2011 could well turn out to be a year of disappointment following the very high expectations set in 2010.

The financial results season is upon us with US analysts predicting significant full-year 2010 and fourth quarter gains for companies such as Dow Chemical, LyondellBasell, Georgia Gulf and Westlake.

An indication of just how high the bar has been set for 2011 has come through fourth quarter results already released by SABIC. Reliance Industries Q3 results for the quarter ending 31 December 2010 were also very good.

The chemicals analysts argue that supply constraints are set to ease slightly on a stronger European economy, resulting in more naphtha availability for cracking.

“Ethylene availability from European naphtha-based crackers dropped 20% below 2007 peak levels (in 2010) as a result of reduced naphtha supply,” writes HSBC in a recent report.

As our fellow blogger Paul Hodges pointed out last week, Saudi Arabia is giving indications that it might pump more oil in order to tame surging crude prices. And if you click on this last link this also gives our view of the threat to chemicals posed by the rising price of oil.

Higher crude output would result in more associated gas for Saudi and other Middle East crackers. According to HSBC, Saudi crackers are currently running at only 80%.

Additional supply from existing crackers in Europe and the Middle East will therefore match demand growth in 2011, predicts the bank.

It also sees what we see: The extreme fragility of the argument that all is well with the world because of healthy emerging markets.

As a result, HSBC doesn’t seem to quite buy into the Supercycle theory being expounded by Morgan Stanley and others.

“We are barely 18 months removed from one of the worst industry troughs in living memory,” writes the bank, in the same report.

“Developed market demand for commodity chemicals is still well below the levels of 2007 with some major end markets, such as US autos and US housing, still at a fraction of their peak-activity levels.

“While emerging market demand remains robust, developed markets still account for 60% of the commodity chemical market by volume, and a sustained multiyear peak is unlikely as long as developed markets continue to drag, in our opinion.”

Hear, hear.

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