Europe chemicals prices could fall 10-20% in April after crude crash, coronavirus fears

LONDON (ICIS)–European chemicals prices could fall as much as 20% in April after the collapse in crude oil prices on Monday and prevailing fears over the impact of the coronavirus outbreak on global economic growth and supply chains, according to ICIS analysis.

The impact of a collapse in production cut talks between OPEC and key partner country Russia late on Friday made itself fully felt on Monday morning, triggering huge drops in crude and stock market prices when markets opened in Asia and Europe.

NAPHTHA PLUMMETS
The impact was immediately felt in petrochemicals spot markets, with naphtha falling 24% ($88/tonne) compared with the close on Friday (6 March), benzene losing 14% ($85/tonne), and styrene losing nearly 10% ($70/tonne) in Monday morning trading.

Expectations for trades further down the value chain for this week evaporated as of Monday morning.

The speed and extent of the falls, coupled with ongoing uncertainty about the full impact of the global coronavirus outbreak on economic growth and supply chains, is making valuations increasingly difficult to determine, pointing to a likely slowdown in trading while players wait to see where the market stabilises at.

The European polyethylene (PE) market, already embattled by a glut of low-price product flowing into the market from global competitors, is on partial lockdown as players digest the latest shock, according to sources.

Some petrochemicals market activity may be driven in a bearish market by buyers understood to be keen to capitalise on likely bargains in the spot market.

DOWNSTREAM IMPACT: APRIL WOES
The true extent of the impact is likely to become more fully apparent when contract negotiations for next month conclude, according to ICIS Senior Analyst Rob Peacock.

“The impact on most downstream chemicals and polymers in Europe will only likely be fully reflected in next month’s contract price discussions, which will depend on how long this further slump in crude oil prices lasts,” said Peacock.

“If naphtha, benzene, and ethylene spot prices stay weak through March, then downstream markets could see a further slump in prices. The recent falls could mean chemicals prices lower by 10-20% into April.”

The extent of the market rout on Monday may not last, but plans by several key oil powers to increase production, and the potential end of the OPEC+ curtailments at the close of this month, could weigh on pricing for significantly longer.

–
“The heavy market sell-off of crude futures may well be short-lived, but the actions of Saudi Aramco in cutting prices and increasing output will continue to weigh on crude and chemicals prices in the coming weeks,” said ICIS Senior Analyst Paolo Scafetta.

“Much will depend on the response of the US and Russian oil industries, with marginal producers in the US likely to cut sooner or immediately.”

PERFECT STORM
The European ethylene market, also weighed by incursions from lower-cost producers in the US and Asia, is likely to enter a “perfect storm” this quarter, as a supply glut and weak demand are exacerbated by the ongoing market crises.

The pricing for propylene stands for the time being considerably higher than the last time crude pricing had fallen to the low $30s/bbl, at around €300/tonne, although the margin for ethylene is thinner at around €90/tonne.

“Expectations for the ethylene market in Europe will worsen. Oversupply, combined with sluggish demand, will exacerbate the already-lacklustre market,” said Scafetta.

“The perfect storm projected in the second quarter will likely happen in the coming weeks, impacting the ethylene contract price for April at the very least.”

The crude price collapse is the latest flashpoint in a global economy that is continuing to slow as the impact of coronavirus fears and the resultant impact on supply and demand stamp out the tepid markers of recovery seen at the start of the year.

Even before the collapse of OPEC+ talks, European chemicals major BASF was projecting chemicals demand growth of 1.2% in 2020, the weakest level since the global financial crash in 2008-2009, with contractions in certain key end markets such as the automotive sector expected as bad or worse as last year.

The IMF last week warned that none of the scenarios it is currently analysing foresee global GDP growth even at the level of 2.9% seen in 2019.

China’s new car registrations fell 80% in February and the impact of the mass industrial shutdowns mandated by the government last month is still to filter through global supply chains.

CORONAVIRUS IN EUROPE 
News of quarantine plans for northern Italy and disruptions to shipping routes to the country illustrate the extent of trade flow disruption that market players are likely to continue to see.

“Many activities in northern Italy have been reduced or halted following the government’s decree to contain the contagion,” Milano-based Scafetta said.

“Other European countries will certainly not be immune to this gloomy scenario over the next weeks given the infection rate. The virus is likely to have stronger repercussions on logistics and industrial activities than previously anticipated.”

Front page picture source: Michael Probst/AP/Shutterstock

Focus article by Tom Brown

Additional reporting by Linda Naylor, Nel Weddle and Katherine Sale.

(Clarification: recasts olefins details in paragraph 15)