By John Richardson
THERE are four major reasons why the first three quarters of 2011 have been excellent for chemicals companies, which are:
1.) Strong co-product credits have supported what have been weak commodity-grade polyolefin markets since March of this year (higher-value grades, such as co-polymer grade polypropylene for auto applications, have been better)
2.) Demand was “brought forward” by economic stimulus in China
3.) European producers have ferociously managed operating rates, and controlled costs, as domestic demand has struggled
4.) US producers have continued to benefit from lower feedstock costs, thanks to shale gas
Co-product credits have fallen through the floor. For example, butadiene prices in Asia have declined by $900 per tonne over the last month.
This has left Northeast Asian cracker operators unable to cover variable costs as core commodity polyolefin markets remain weak.
And why have butadiene prices slumped so dramatically? It must be autos demand, which as we have reported before on the blog, is growing far-more slowly in China during 2011 because of the withdrawal of economic stimulus.
Indian auto sales fell by 23.8 per cent in October, their biggest decline in a decade, as high interest rates designed to cool an overheated economy take their toll.
Europe faces a deep recession, possibly a new Depression, as former UK finance minister Alastair Darling has indicated. Politicians haven’t got a clue about how to solve its problems
In the US, Obama won’t get any help from the Republicans in rescuing the economy ahead of the 2012 Presidential Elections.
And as for the leading candidates for the Republican nomination, well, the blog best keep quiet….
China remains the great hope. But it is playing a dangerous game as it tries to balance tackling inflation and a rising non-performing loan crisis with growth.
The risks are ahead are enormous, way beyond what it is likely to be a very bad fourth quarter for the chemical industry.
Good long-term strategic planning is essential, but as one consultant told the blog during its recent visit to Houston, every US chemicals company bar one have laid off their in-house economists.
When the direction of demand was forever upwards, before the New Normal, ignoring the long term didn’t matter that much. All you had to do was manage your business efficiently in short-term downturns while waiting for the inevitable strong rebound.
Now life is a great deal more complicated.