By Nigel Davis
LONDON (ICIS)--Tracking the ICIS Petrochemical Index (IPEX) and its regional components highlights the interconnectivity of many of the principal chemical markets and the influence of China sentiment on them.
Does the drop in the index for March – the first fall in 10 months, driven by concerns over demand – signal a shift in market sentiment that will track across the globe? If it does, the second quarter could be tougher than many might have expected.
Petrochemical prices in northeast Asia were under pressure in March as uncertainty and oversupply gripped some China markets following the Lunar New Year holidays.
The price weakness, following a bullish 10 months, reflected concern over demand as well as pockets of oversupply. Enthusiasm from buyers before the holidays gave way to much weaker markets after the break with product not moving from storage.
Weaker oil prices from 6 March clearly had an impact on markets where supply had been tight but demand uncertain. Oil prices began to move up towards the end of the month and that is likely to have tempered some of the roll-on effects globally from lower Asia numbers, with buyers monitoring the trend closely.
Nevertheless, it is the uncertainty of demand in China that will colour the second quarter for most of the major petrochemicals. The IPEX numbers for March – down 3.1% at a global level and down 10.4% in northeast Asia – were driven by the situation in China.
The IPEX represents a basket of 12 petrochemicals and polymers including the major olefins, aromatics and polymers, alongside methanol. And, because Asia markets are spot-price based it is this region that tends to drive price direction globally with a time lag.
The real question is whether the turn down in Asia is demand led or not. A lack of availability and a remarkable shift in sentiment pushed butadiene (BD) prices in northeast Asia much higher from November last year. But this particular petrochemical bubble burst from around 10 February. Prices have plunged since.
BD prices rose worldwide in reaction to the situation in China but weakness has been showing for some time. Principally, it is tyre demand that drives the butadiene price so new and replacement tyre consumption in China is a critical factor. Butadiene prices in northeast Asia in March were down 29.0%.
This was due to styrene monomer plant maintenance but also to the overhang of stocks built before the Lunar New Year. There has been talk of styrene prices hitting bottom while some market participants think there is more downside.
The April benzene contract price in Europe was agreed down 25.6% reflecting lower spot numbers through March, although prices were rising towards the end of the month on rising crude. Europe had been falling into line with the rest of the world.
But price movements have been different on less easily transported products with northwest Europe April ethylene contract price, for instance, rolling over from March.
In the US, the March ethylene contract price could be settled down sharply as more supply comes on stream, a further indicator of a turning point in price movements and of insufficient demand growth to support continued price increases.