Chemicals In A Vicious Cycle



By John Richardson

OIL prices could fall to as low as $35-40 a barrel or might slip no further than $60-70 a barrel, depending on which analyst you belief.

And we know of one global polyolefins company that is working on the assumption that crude, both West Texas Intermediate and Brent, will trade between $40-80 a barrel in the second half of this year.

What a difference a few months have made. If you remember, back in early Q1 the consensus was that crude, and commodity prices in general, had only one direction to go – and that was up.

Now, though, even Morgan Stanley, of all people, are admitting that the high cost of oil has caused demand destruction, as fellow blogger Paul Hodges has been pointing out for well over a year.

And we have consistently warned that China was at risk of severely slowing down because of structural changes in its economy and we’ve been proved right. What we didn’t predict was the escalation of the Eurozone crisis.

So, if you’re a purchasing manager for a chemicals and polymer consumer, why on earth would you want to do anything other than keep your acquisitions to absolute minimum?

As Hodges points out in the slide above, a virtuous circle of buying forward on the risk higher crude has become a vicious circle for the chemicals industry.

The risks to the global economy are also escalating, meaning that any chief financial officer with her or his salt needs to horde cash. 

Soe small and medium-sized companies are also likely to face a funding crisis.

This is all being reflected in numerous ICIS news stories that talk of falling prices down the value chains from crude, resulting in weaker demand.

Here just a few examples:

*Yesterday, Asia’s isopropanol (IPA) prices had fallen to their lowest level in nearly six months amid persistently low demand in the key Chinese market and weak feedstock acetone and propylene prices.

*Last week, Asian ethylene prices fell to a two-year low as crude, and of course, naphtha declined, resulting in ample supply.

*And earlier this month in Europe, polyethylene (PE) buyers put their purchases on hold in anticipation of lower July ethylene contract prices.

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