INSIGHT: Coronavirus restrictions exacerbate crude falls and chemical prices suffer

Author: Nigel Davis


LONDON (ICIS)--Travel restrictions, school and business closures and states of emergency do not only slam stock markets and rattle investors, they hit physical trade.

Following the most tumultuous week on global markets at least since the 2008/09 ‘great recession’ it is becoming much clearer that, no matter what actions governments take to combat the spread of the coronavirus Covid-19, the impact of the disease will be strung out over much of this year. It may well persist for years.

Extreme stock market volatility is an indicator of just how little we know and how little we can determine with any degree of accuracy about the spread and impact of the virus.

The UK, for instance, thinks it may have a two to four week window of opportunity before infection levels reach those seen now in Italy. It has become a question of trying to flatten the curve of infection: spread it out over weeks and months until ‘herd’ immunity builds in the population. That, in effect, should limit the extreme pressure the virus outbreak puts on health services, individuals and the economy.

But what does this, and the much more drastic measures implemented in other countries worldwide designed to limit the spread of the virus mean for physical markets and chemicals trade.

Companies are reacting to events and will be forced to continue to do so. INEOS on Thursday reiterated the fact that it makes products essential for everyday life. That is what chemical companies do. But the health of its employees comes first. It has introduced a series of measures to ensure continued plant and business operations, sent most office staff to work from home and postponed non-essential work at its sites.

We hear of chemical producers being asked by government to switch some production so as to make more disinfecting and related chemicals. Other producers are asking more staff to work from home.

This is a fluid situation and companies will seek to protect workers while protecting cash as far as is possible. The virus outbreak has already had an extreme impact on corporate balance sheets given the staggering share price falls seen this week. For petrochemical producers too, the oil price crash threatens sharp product price reductions while it changes margin dynamics.

By Thursday 12 March a global ICIS daily petrochemical price index was down 10% week on week. Regional indexes were down 9% in northeast Asia, 13% in the US and 15% in northwest Europe.

The component products in the index are reflecting the oil price crash alongside the coronavirus impact on demand and to a lesser extent to supply.

ICIS price data show benzene and styrene spot prices in Europe down 21% and 7% respectively week on week on Thursday. Spot propylene prices in the US were down 15% over the same period. In northeast Asia spot ethylene prices were 8% lower.

ICIS analysts estimated earlier this week that petrochemical contract prices in Europe could be down 10-20% month to month in April. The contract mechanisms in place across the industry will see spot price volatility ironed out to some extent.

The chart below of the global monthly ICIS Petrochemical Index (IPEX) against Brent crude illustrates how petrochemical and polymer prices have reacted to previous significant oil price movements.

The index is based on February contract or average prices. The February contract prices would have been agreed at the end of January or at the beginning of February and, therefore, not reflected the market pressure brought about by the coronavirus outbreak in China. Likewise, a monthly oil price is shown for the February value and does not reflect the crash in prices earlier this month.

Petrochemical and polymer prices tend to follow crude oil with a time lag of about six weeks for those used to compile the ICIS Petrochemical Index.

ICIS Consulting Vice President, James Ray, explains that the average time lag usually correlates highly to the days on hand of inventory in the supply chain. Of course, the further down the value change a product is, the less impact the oil price movement has and the longer it takes.

Petrochemical and polymer prices will be under severe downward pressure in the coming weeks from lower priced crude.

And looking at the extent – and speed – of price falls after the collapse of crude prices in 2008 and the drop in 2014 it would not be unreasonable to expect a similar impact soon.

Producers usually have difficulty holding on to prices in a down market. This time their position will be further weakened by demand side weakness which is developing to a largely unknown extent.

Insight article by Nigel Davis