It is hard to be very optimistic about the demand outlook for Q2.
Demand in Q1 was lacklustre, even though it should have been the strongest quarter of the year. H1 is seasonally strong, and Q1 also benefited from Easter being in Q2. Equally, the Chinese holidays fell in January, so February and March should have seen a major recovery.
Just as in April 2011, the oil price rally seems to have peaked, so there is little need for buyers to buy forward. More likely, we will see destocking down the value chain instead. CFOs are clearly worried about today’s high levels of working capital, given that bank credit can be difficult to obtain.
The real problem is that the years since the start of the Crisis have not been used to solve the major problems. The banana skins highlighted by the blog in January have become more dangerous, not less:
The USA has not solved the housing crisis, the original cause of the Crisis. Homeowners have suffered a $7tn loss of wealth, and 12m (1 in 5 with a mortgage) now owe more than their house is worth.
Europe is still suffering from its debt crisis. Policymakers continue to mistake sound-bites for action, and their recent move to impose austerity will only increase social tensions, rather than solve the problems.
China, meanwhile, has done little to refocus its economy on domestic consumption. Premier Wen’s speeches are clear about what needs to be done, but he seems unable to carry his senior colleagues with him.
In addition, Western policymakers have allowed oil prices to increase to record levels. They mistakenly believe that stronger financial markets will increase consumer confidence. Instead, high oil prices destroy demand, and make today’s tight credit conditions even more difficult.
The chart shows price changes since the IeC Downturn Monitor launch on 29 April, with ICIS pricing comments:
PTA China (red), down 13%. “Most players were staying at the sidelines during the two trading days of the week because of the unclear outlook for downstream polyester demand in April”
Benzene NWE (green), down 10%. “Traders suffer weak demand, as players take a wait-and-see approach with regard to upstream crude oil”
HDPE USA export (purple), down 6%. “Globally, prices were slightly lower on weak demand”
Naphtha Europe (brown dash), down 2%. “Demand from the petrochemical industry remains subdued”
Brent crude oil (blue dash), down 1%
S&P 500 Index (pink dot), up 3%