Intuitively The Problems Are Building

By John Richardson

THE signs are ominous as they have been since the beginning of the crisis.

Intuitively, it still feels as if we are heading for some major macroeconomic problems. As Andrew Liveris, CEO of Dow Chemical, put it last week: “Overall, the world continues to recover to pre-recession levels. However, with inflation concerns in emerging geographies, lingering unemployment issues in the US and sovereign debt issues in Europe, we remain prepared for a reversal of momentum.”

Call a crisis for long enough you will eventually be proved right, based on the maxim that what goes up must eventually come down,.

But rising oil prices, along with overall inflation, do seem to pose the most immediate threats for 2011 over what was a fantastic 2010.

ExxonMobil Chemicals lower sequential quarter-to-quarter segment earnings in Q4 last year reflected an inability to fully pass on rising feedstock costs and new petrochemical capacity, my colleague Nigel Davis wrote last week.“The closing quarter of 2010 was a disappointing end to the year for many petrochemical producers,” wrote chemicals consultancy ChemSystems in a report published last week.

“Renewed pressure on feedstock costs depressed profitability of petrochemicals in many markets, eroding strong gains in margins achieved in the first half of the year,” added the consultancy.

Not surprisingly it was the European producers who were hammered the hardest because of their reliance on liquid feeds. Naphtha costs surged on crude and the severe northern hemisphere winter made liquefied petroleum gas (LPG unaffordable. The end-result was cracking margins being squeezed by Euros160/tonne, according to ChemSystems.

The US did much better because of its natural gas advantage with average polyethylene margins down just 5%.

Cash margins for Middle East producers were in contrast 14% higher.

So where do we go from here?

A key measure will be how Asian petrochemical markets respond as they return from the Chinese New Year Holidays this week, provided one can separate the usual nonsense talked by the huge trading community from what is really happening.

This could obviously be a very tough year for the higher-cost Northeast Asian cracker players as a result of further erosion of market share in China and the pressure from higher crude. As fellow blogger Paul Hodges pointed out last week, 2010 polyolefin import data showed a substantial gain for the Middle East in China at the expense of Japan, South Korea – and also Southeast Asia.

“The considerable cumulative excess capacity built since 2008 will take many years (to absorb) and operating rates will remain heavily depressed in the near term,” ChemSystems added.

It is likely, as we have said before, that more of this cumulative excess capacity will hit the market in 2011 than in 2010.

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