Chemicals squeezed between feedstock price hikes and downstream malaise

Author: Will Beacham


BARCELONA (ICIS)--The current run up in oil prices has raised the price of petrochemical feedstocks, but the hikes may not be pushed through effectively to downstream chemicals and polymers as so much demand remains depressed by lockdowns.

This leaves the chemical industry potentially squeezed in the middle, with more downwards pressure on margins for many markets, especially those exposed to automotive and durable goods.

Even polymers for packaging, which boomed during the panic buying of March-May, are likely to return to more normal demand patterns.

Most polymer prices have not yet rebounded with the same intensity as crude. An uptick in US PE exports and prices has been driven more by lower tariffs than a recovery in demand.

As lockdowns are eased around the world, the industry lives in hope of a recovery in downstream demand and pricing.

Expectations for June and July are high but, so far, these are hopes rather than reality.

Positive consumer sentiment is vital to boost economic activity. People will only buy big ticket items such as automobiles, houses and electronic goods if they are feeling confident about the future.

Otherwise, they just purchase the bare essentials for life and this has kept home and personal care, food and medical markets relatively stable during the crisis.

With unemployment rising around the world, many people are feeling nervous about the future and are saving rather than spending.

In the US alone, more than 40m people have filed for unemployment benefit in the last ten weeks, and the  unemployment rate has reached 14.7%, from 4.4% in March.

The world is heading for a recession in 2020, with rising unemployment and deep falls in GDP in the first half of the year which could take years to recover to pre-coronavirus levels.

China came out of lockdown first so should be leading the march towards recovery, but the fact that the government decided not to set a GDP target for this year indicates all is not yet well with its economy.

There is a good chance the country’s GDP will contract this year.

This is reflected in chemical markets; for example, as we report this week, monoethylene glycol (MEG) plant run rates stood at above 70% in March, but fell to 60% in April and dropped to around 55% by late May.

As prices tanked, producers saddled with squeezed margins or even losses had to cut or suspend production.

Port inventories in east China rose to around 1.32m tonnes in the week ended 22 May, a surge from 459,000 tonnes seen in early 2020.

China’s export markets are not yet strengthening, especially for finished goods.

The textiles sector, for example, remains in the doldrums with domestic demand shrinking while market players wait for overseas orders to pick up.

These themes were discussed in a podcast this week with senior commentators John Richardson, ICIS Senior Consultant, Asia; Paul Hodges, chairman at consultancy International eChem, and ICIS Insight Editor, Nigel Davis.

“A rising oil price is the worst thing that could be happening. Costs are rising but downstream is just becoming a disaster area,” according to Hodges.

He highlighted the Chapter 11 bankruptcy protection filing of Hertz in the US, which he compares to the collapse of investment bank Bear Stearns during the 2008-2009 financial crisis.

The company has 700,000 cars sitting at airports which are now likely to come onto the used car market, depressing prices.

Car rental firms make up 20% of new car demand in the US.

John Richardson pointed out that chemical prices are not rising as quickly as oil and, although ethylene, propylene and benzene prices increased, downstream prices are not yet following suit.

“A lot of the ramp-ups in China are speculative, with the idea that China will come roaring back later this year. I can’t see chemicals and polymers demand growth being positive in China this year,” said Richardson.

Hodges said that retailers in the west – many in financial difficulties - do not yet have the confidence to place big orders with Chinese suppliers for Christmas and Thanksgiving.

Nigel Davis highlighted how difficult it is to make projections about the course of the pandemic, and its effects on the economy.

“You can make a prediction now and within a week or so that could be completely wrong. We know there will be a slow recovery from the pandemic but how economies comes back, and the impact on individual chemicals, will vary greatly.”

Developing countries may experience a decade of lost growth due to the pandemic, with estimates of between 60-420m people pushed into extreme poverty.

Western retailers have cancelled orders for clothing from Bangladesh, a country where textiles accounts for 20% of GDP and 81% of its exports.

In Richardson’s analysis: “People say this won’t be as bad as 2008/9 but I don’t get that. The sheer loss of economic activity – bigger than the Great Depression – means I can’t see chemicals and polymers registering positive growth this year," said Richardson.

"For anything going into durable goods especially I expect deeply negative growth and some consolidation in the industry.”

For Davis, low operating rates are unlikely to improve over the next weeks and months because there is so much product reportedly in inventory.

Hodges concluded: “This is the move to the New Normal - chemical companies face a critical choice. Are they going to continue piling on the debt, and run for cash to pay out in share buybacks?

"Or are we going to refocus on essentials, the things people can afford? Will we build a chemical industry for the future needs of society or for the benefit of adventurers in Wall Street?”

With the IMF warning of the worst downturn since the Great Depression the commentators are most worried about social unrest and government mismanagement which could make the pandemic effect even worse.

Focus article by Will Beacham

Additional reporting by Cindy Qiu