Many investors and policymakers believe that the global economy is just in a ‘soft patch’. They expect a quick recovery early in 2012. This parallels their misguided confidence in Q1 that a strong recovery was underway.
But petchem markets, a much more reliable indicator, are suggesting we are at the start of a sustained downturn. Of course, as the above chart shows, there are moments when buyers need to buy, and find product hard to obtain for a week or so. But this is not the same as a recovery.
The key fact is that producers are operating at very low rates, and yet no real shortages have appeared:
• China is the most worrying market. PTA producers are cutting output by 18% in December. This is one of the blog’s benchmark products, and it clearly indicates a major collapse in demand.
• Similarly, an European polyethylene producer told ICIS that they “simply hope to be able to stabilise the situation in December and work through inventories in January”.
ICIS pricing comments this week, and price movements since 29 April for the benchmark products in the IeC Downturn Monitor are below:
Benzene NWE (green), down 36%. “Weak end user demand and an uncertain macroeconomic outlook”.
HDPE USA export (purple), down 24%. “US prices are generally too high to be of much interest in Asia.”
Naphtha Europe (brown dash), down 24%. “Supply is ample, amid disappointing petchem demand.”
PTA China (red), down 20%. “Weak demand because of tight cash flow and the year-end lull season, uncertain macroeconomic environment, and China’s declining PTA futures.”
Brent crude oil (blue dash), down 14%.
S&P 500 Index (pink dot), down 15%