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“A failure to stay ahead of events”

Economic growth
By Paul Hodges on 11-Jun-2012

D'turn 8Jun12.pngPetchem markets are doing an excellent job in their role as a leading indicator for the global economy. But as we warn in Boom, Gloom and the New Normal, policymakers remain in Denial about their message.

The chart above spells it out clearly.

Volume leads pricing. Since January, China’s demand growth has collapsed. So its PTA prices (red line) have collapsed by 42%. Similarly, slow US demand means polyethylene producers have to chase volume in export markets, and so their prices (purple) are down 27%.

Equally in Europe, demand is extremely weak. Oil demand was down an astonishing 4.4% in March. Thus naphtha prices (brown dotted line) are down 33%, whilst Brent prices (blue) are down 20%.

Meanwhile, spot benzene pricing (green) highlights how today’s low volumes have created a vicious circle for purchasing managers:

• Buyers kept inventories low, as prices fell down the value chain
• But markets were then hit by supply problems, and prices soared
• Now the benzene/naphtha spread is $631/t, a near record level

Some commentators, such as former EPCA speaker Martin Wolf, do get the message however. As Wolf wrote last week in the Financial Times:

Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events.”

The blog can only repeat its warning from last month:

“If there is a serious downturn, it could well be far worse than 2008”

Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments, are below:

Naphtha Europe (brown), down 33%. “Demand from the petrochemical industry remains poor”
PTA China (red), down 30%. “The 10% fall in PTA prices caught most players off guard”
HDPE USA export (purple), down 28%. “US Gulf prices are workable into South America”
Brent crude oil (blue dash), down 20%
S&P 500 Index (pink), down 3%
Benzene NWE (green), up 5%. “Continued availability restrictions for prompt material kept upward pressure on the European benzene market “