Broad Commodities Sell-off Beckons

Business, China, Company Strategy, Economics, US

By John Richardson

THE blog remains extremely worried that there is about to be a major sell-off of commodities in general, including petrochemicals, as conditions right now feel very similar to those in 2008.

Whether we will face a systemic shock to the system, a black swan, on the scale of Lehman Bros is of course something nobody can predict.

But a sharp correction in pricing, regardless of such a shock, feels imminent and it might have already begun.

Goldman Sachs on Monday signalled it was time to take profits from its CCCP basket of commodities: crude, copper, cotton, soya beans and platinum.

“Not only are there nascent signs of demand destruction, but also record speculative length in the oil market,” the bank said in a note to clients.

This was blamed for a subsequent correction in oil and other commodities within the Goldman Sachs.

But other forces, apart from Goldman prompting a sell-off, was behind the fall in oil prices by around $4 a barrel overnight on Monday.

In petrochemicals we saw declines in polyethylene (PE) week.

Paraxylene (PX), purified terephthalic acid (PTA) and mono-ethylene glycol (MEG) have been falling for two weeks in a row. MEG prices are down by 14% from $1,275//tonne CFR China February – a 37-month high, according to ICIS pricing.

Affordability seems to be a problem across petrochemicals in general as end-users struggle to pass on costs to their customers.

Fellow blogger Paul Hodges, in this excellent post, tracks the the long-term history of crude. He argues that average annual prices of over $50 a barrel, and of course we are well beyond that level now, have traditionally cause demand destruction.

In China, inflation is a major concern with increased interest rates and bank-reserve requirements restricting credit for small -and medium-sized enterprises.

A common story across several petrochemicals seems to also be that less bank lending in China is making it harder for the speculators to speculate. Speculative activity has offered big support to markets ever since the Chinese stimulus package was launched in late 2008.

And here’s a worry on MEG: Inventory levels are reported to be very high.

“There is 600,000 tonnes in tanks in China a that the moment compared with the usual 400,000 tonnes,” a source with a major producer told us last week.

As has been the case with PE since the Chinese New Year, might we see an attempt to re-balance markets through re-exporting this material?

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