BASF warns on outlook; Dow warns on China, ethylene cycle

Economic growth

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ACC Jul5BASF and Dow Chemical both warned on the outlook when presenting their H1 results last week:

  • BASF CEO Kurt Bock warned, “We have for second quarter in the row in chemicals no growth worth mentioning . . . that is not a gratifying development.  We have the impression that there is little growth dynamic at the moment and our customers remain extremely cautious about building up inventories.”
  • Dow CEO Andrew Liveris warned, “”China remains a mixed bag. A very solid Q2 for us is not necessarily a harbinger of Q3“.  And he went on to add, “This is not yet a [peak of the ethylene] cycle discussion, but it’s starting to mimic one with outages.

Equally, as Reuters note:  “Dow has benefited from cheap U.S. shale gas.  This cheap fuel had given Dow a cost advantage over its European rivals dependent on crude oil-derived naphtha. But with crude prices slipping, that advantage is now eroding.”

Both major companies are thus confirming the message of the chart above, based on American Chemistry Council data.  This shows that global capacity utilisation (CU%) in May was just 83.5%.  Equally worrying is that the economic recovery created by the start of the stimulus programmes in 2009-10 has clearly weakened.  As a result, average CU% levels are down by nearly 10% – from an average of 93.4% between 1987 – 2008, to just 84.5% since 2009.

One key issue is that the recent rally in oil prices, and the major problems with force majeures, have not caused prices to increase further down the value chain. This confirms the underlying weakness in the market, as consumers are not able to pass through today’s higher prices to their customers.

China’s change of economic direction under its New Normal policies is, of course, the catalyst for this downturn. In the longer-term, this should be extremely positive.

But unwinding the problems of the past will be [painful in the short-term.  The Bank of England has already warned that China’s GDP growth may fall to 1.7% in Q4.   And whilst clearly some areas of the economy, such as the mobile internet, will likely continue to do well, it would be no surprise at all if China’s real GDP growth hit zero next year.

WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Brent crude oil, down 47%
Naphtha Europe, down 47%. “Abundant naphtha supply (up 15%in June versus 2014) continues to exert pressure on prices”
Benzene Europe, down 39%. “Players noted that several fundamental factors are likely to weigh down on the market in the coming weeks”
PTA China, down 37%. “Producers continue to face squeezed margins in the market and low demand from polyester makers.”
HDPE US export, down 21%. “Trading was thin as buyers waited to see how low oil prices will drop.”
¥:$, down 21%
S&P 500 stock market index, up 6%

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