Cash-flow fears rise as the ‘storm’ gets nearer

Chemical companies

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D'turn 4May12.pngThe blog fears the storm discussed last month is getting closer.

Oil prices have weakened, with Brent falling $7/bbl last week to $113/bbl as Iran worries reduced. Attention is thus refocusing on the fundamentals, where US oil inventories are now at 21-year highs. We may therefore be about to discover that high oil prices have once again led to recession.

Petchem markets are, as usual, providing leading indicators of this potential change in sentiment. ICIS pricing reports on polyethylene this week capture the position:

China. The market outlook remained bleak… the deteriorating eurozone debt situation continued to weigh on orders from export-oriented converters.”
AsiaPacific. “Relentlessly weak downstream demand, coupled with softer upstream ethylene and naphtha prices.”
ME. “Slowdown of buying momentum in Asia, Europe and the Middle East for May cargoes.”
Europe.Several (producers) say that they will cut output rather than jeopardise margins but converters say it is already too late for that.”
USA.April demand was much weaker than expected, according to suppliers and some buyers.”
Latin America seems the only exception. “Markets remain relatively tight with some production problems affecting supply.”

The big danger is now to cash-flow, particularly for the vast number of small/medium-sized firms who depend on the banking system for loans:

• Buyers rushed to buy forward in Q1 to protect their margins against rising oil prices, and so inventories are high all down the value chain
• But today, the reverse pattern is in place. Buyers are scared to buy, as they fear prices might be lower tomorrow.

In European polypropylene markets, for example, ICIS news reported that “buyers are being cautious when placing orders for May, with smaller ones buying truck by truck, and for the week rather than the month“.

Thus today’s inventories will take time to work down, particularly as we will soon enter the seasonally-weaker summer season. In turn, CFOs will become increasingly worried about their high levels of working capital.

The chart shows price movements since the April 2011 launch of the IeC Downturn Alert, with latest ICIS pricing comments below:

Naphtha Europe (blue), down 16%. “Participants expect the European market to lengthen further ”
PTA China (red), down 13%. “Buying interest from Chinese polyester makers was weak as their polyester yarn inventory remained high”
HDPE USA export (purple), down 11%. “Buying interest is limited as buyers are expecting prices to fall further in the next few weeks”
Benzene NWE (green), down 4%. “Restricted availability within the ARA region for May kept upward pressure on prices”
Brent crude oil (blue dash), down 6%
S&P 500 Index, no change

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