Relief Rallies Will Not Be Sustained

By John Richardson

FURTHER relief rallies in petrochemical markets that occur over the next few weeks and months will not change the overall direction.

Buyers will inevitably run short of stocks down all the value chains and we thus will see some more brief flurries of price rises.

Another driver of inventory rebuilding will be recoveries in the oil price and stock markets. But such recoveries will merely reflect investors pouring money into more risky assets on an improvement in sentiment. It will, as we said, not change the direction of the underlying fundamentals.

Many investors in oil, other commodities, including petrochemicals, and shares have, of course, a very short-term perspective. All they care about is making money out of these “relief rallies” and getting out before markets tank again. The best analogy I have heard came from fellow blogger Paul Hodges when he described what we are going through at the moment as equivalent to a squash ball bouncing down a flight of stares: The overall direction is down, but there will be mini peaks and troughs on the way.

China’s willingness and ability to buy when it’s cheap and then quit will drive many of these bouts of restocking.

Take paraxylene (PX) and mono-ethylene glycol (MEG) as current examples.

PX shipments to China from the US and Europe were approximately 75 percent higher in November alone compared with the first ten months of this year, according to ICIS news.

Nearly 60,000 tonnes of November and December MEG cargoes from the US are heading for China, about 80% of the 75,417 tonnes that were shipped during January-October.

Given that PX and MEG prices are sharply lower, this is hardly surprising (see slide below):PXMEG.jpg

Last week’s decision by China to cut bank-reserve requirements by 50 basis points, and likely further measures to ease liquidity, will make it easier for buyers to stock-up.

Global markets might be so weak for certain products that a return of Chinese buyers might not be sufficient to even cause a modest and brief recovery in prices.

In the case above, an essential question to ask is the extent of lost sales in the US and Europe along the synthetic fibre chains. According to data from consultants PCI, 1.85m tonnes/year of PTA capacity in Europe was shut for between 2 and 10 days in September to November, while 1.59m tonnes/year of US PTA capacity will be shut for a total of 15 days in December because of poor margins.

Another factor behind increasing fibre intermediates shipments from the West to China is the desire by US and European companies to, as always, monetise inventory before they close their books at the end of December. This will help boost financial results and thereby, of course, share prices.

There is a rapidly closing window of opportunity for booking cargoes to China that will arrive sufficiently ahead of the 2012 Chinese New Year, which falls on 23 January. Nobody in China, as is always the case, wants to be in the position of cargoes arriving just as customs and logistics companies start winding-down their operations for the Lunar New Year.

US polyethylene (PE) producers are also trying to shift as much volume as possible to China in order to beautify their end-year financial results, an industry source told the blog.

“But right now this is proving difficult as firstly, the delivery window ahead of the Lunar New Year is closing and secondly, container shipping space is limited.”

Some chemicals analysts will argue that the odd price recovery, and these bouts of re-stocking, will mean that their flawed analysis is, after all, right – i.e. that we are heading for an up-cycle in global operating rates on strong overall global demand. For example, ethylene capacity utilisation is still being forecast to reach 90 per cent by 2014.

It is not going to happen. As we began to describe in our posts on Monday, Tuesday and Wednesday this week, and will continue to outline over the coming weeks, with what we hope will be useful summaries of our key conclusions as we go along, we are entering a new a global recession – quite possibly a Depression.

The winning chemicals companies will be those which adapt their businesses to the New Normal.

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