INSIGHT: First-quarter price and margin falls hit petrochemical/polymer producers hard

LONDON (ICIS)–Petrochemicals and polymer producers faced difficult headwinds in the first quarter of the year, with demand growth slow and overcapacities influencing prices and margins.

The much tougher business environment – a persistent hangover from a surprisingly poor fourth-quarter 2018 – will be reflected in upcoming quarterly earnings reports across much of the sector.

Petrochemical and polymer prices fell dramatically in the fourth quarter of 2018 and the steep downward trend continued through Q1 2019.

Looked at on a quarterly basis, the ICIS Petrochemical Index charts the fall in prices (the index is based on the price movements of a basket of 12 of the most important petrochemicals and polymers) from the fourth quarter of 2019.

The drop in the global IPEX sequentially from the third quarter was 10% with the northwest Europe IPEX down 7% and the US IPEX 6% lower.

On a year-on year basis, the global IPEX was down 2%, signalling that all was not well, while the northwest Europe IPEX was up 3% and the US IPEX up 2% at the time.

The IPEX tends to follow crude oil prices in the different regions with a time lag of a few weeks and it is based largely on contract prices (in northwest Europe and the US) and on spot prices (averages) in northeast Asia, an inherently more volatile petrochemical and polymer price environment.

It is a moot point as to whether northeast Asia prices lead the rest of the world. But there is a strong link between prices globally and those in the world’s largest and most dynamic petrochemical and polymer market.

Trade tension with the US and the environmental clampdown in China last year hit growth as industrial output was curtailed. The knock-on impact has been felt this year with stocks petrochemical stocks rising in major China markets and not depleting as might be expected following the Lunar New year holiday in February.

There are some encouraging signs, however, that a trade agreement with the US may be nearing.

Meanwhile, the American Chemistry Council’s chemicals production index for China has shown some growth month to month in January and February this year. The output index for China fell 2.2% in 2018. (see interactive data here)

The ICIS petrochemical Index data show the extent to which lower prices will feed through company financial results for the quarter. The Global IPEX was down 15% year on year in the first quarter reflecting a 15% fall in index values in the three major producing and consuming regions.

Lower product prices have an impact on everyone while a weaker oil price environment also benefits olefins and polyolefins producers using predominantly naphtha as a cracker feedstock.

The difference is clear in ICIS margin analysis, with the quarterly values regionally and globally shown on the graphic.

The chart throws a spotlight on weakening margins for producers in Asia from the fourth quarter of 2017 and in Europe from the first quarter of the following year. Taking high density polyethylene (HDPE) margins as an example, the trend has been steadily downwards in northeast Asia while it has fluctuated somewhat in northwest Europe. Sequentially rom the fourth quarter, however, the direction is clearly downward.

Enjoying very healthy variable HDPE margins until the fourth quarter of 2017, ethane-based integrated producers in the US have suffered a considerable decline, reflecting largely the shale-based capacity build up. Declines of this magnitude will weigh heavily on US-based producers which saw the operating environment worsening further in the quarter than had been expected.

It becomes a question then, of how quickly demand growth, driven by global economic and industrial expansion, can absorb the new production volumes.

By Nigel Davis