Petchems Confront Another Lehman Bros


By John Richardson

THE main issue facing Asian cracker operators a couple of weeks ago was how long co-product credits would continue to compensate for a moribund China polyethylene (PE) market.

Feedstock cost is now the biggest immediate worry. A hike in naphtha saw integrated low-density PE (LDPE) margins plummet by $172/tonne, according to the 25 February ICIS pricing Asian PE Margin Report.

But while the crisis in the Middle East might be dominating everyone’s attention, the weakness in China hasn’t gone away.

Some contacts told us that imported prices for PE edged up by $15-25/tonne last week.

But from most of the meetings the blog held in Singapore last week, we could find no evidence of any improvement in pricing.

End-users remained severely hampered by temporary labour shortages caused by the job-hopping and the credit-tightening we have already discussed.

An improvement in overseas pricing doesn’t also marry with continued reports of domestic pricing suffering further declines, said most of our sources.

The main focus in China right now is on reducing high levels of inventories of imported material through, for instance, re-exports by traders to South America, Vietnam and Turkey, they added.

The crisis in Libya is at front of mind, a sympton of which was last week’s 8.8% rise in naphtha costs on higher crude.

“The prospects for this year looked very good before Libya. Tunisia and Egypt caused some concern, but we now have no idea about the full implications of what we are confronting,” a senior Singapore-based industry executive with a leading polyolefin producer told the blog last week.

A great deal of Saudi Arabia’s crude production is in the east of the Kingdom, where there is also a large community of Shia Muslims. It is the Shia majority in nearby Bahrain that have been behind the unrest there.

Assessments of the likelihood of unrest in Saudi Arabia have moved from a “no” probability to a “low” probability in the space of a week.

Saudi’s apparent decision to raise oil output last Friday, which helped to calm markets, illustrated once again its crucial role ias a swing producer. Any disruption to the country’s production could, as a result, be disastrous for the fragile global economic recovery.

“If crude were to suddenly go to $150 a barrel I could see demand falling overnight by 20%,” the senior executive added.

But even if there are no problems in Saudi, analysts at Nomura have calculated that if unrest were to spread to Algeria, crude could rise to $220 a barrel.

Comparisons are therefore being drawn with the 1973 oil embargo, the Iranian revolution and Iraq’s invasion of Kuwait.

The big danger is that petrochemical companies may not adequately see this risk.

They could instead look at last year, assume the global recovery will continue, and buy raw materials ahead of further increases in naphtha and other feedstock.

We are confronting another shock for the world’s economy on the scale of Lehman Bros. Great caution is needed.

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