Benzene highlights rising risks in financial markets

FTA v BenThe blog is busy preparing its presentations for its World Aromatics and Derivatives Conference later this month, co-organised as always with ICIS.  As well as looking at the impact of the transition to the New Normal, it will be investigating the current state of benzene markets.  These are always an excellent leading indicator for the global economy, and the current position is particularly significant.

As the chart shows, there is normally little alignment between benzene prices (red) and major financial indices such as the Financial Times All-Share Index (FTA)).  Both should move in line with their own supply/demand balances, and any parallels should be coincidental.

  • There was very little correlation between 1980-2004
  • Both markets did however see major volatility between 1986-90, after the 1985 collapse of oil prices
  • But strong correlation then began to appear in 2004, and has since become a major feature of the landscape

What is behind this change?  10 years is clearly a long enough period to suggest that new drivers have appeared.

The key is perhaps that benzene markets have lost their major sources of on-purpose production. Instead supply now depends on developments in refining and oil markets, and doesn’t adjust with changes in demand levels.  Shortages and surpluses have become more obvious and longer-lasting.

In turn, this development seems to provide a possible answer to the question.  As the blog has discussed in the past, we are now seeing major correlation between oil prices and financial markets for the first time in history, due to the stimulus activities of central banks:

  • In financial markets, they have funded a major buying surge, by providing unlimited and very cheap cash
  • They have also created a panic amongst pension funds, due to their implied policy of weakening the US$
  • As a result, many funds have now invested in oil, believing it has become a new asset class
  • Equally, high-frequency trading in oil markets now dwarfs physical market volumes

Oil markets have thus lost their role of price discovery.  And in turn, this has also impacted benzene markets.  Neither are now trading in line with their own fundamentals of supply and demand.  Instead, they are effectively being manipulated by short-term financial flows.

But these flows cannot continue forever, of course.  What happens next is the question the blog will aim to answer in Brussels.

The weekly comments from ICIS pricing and price changes since January on the benchmark products in the blog’s Downturn Monitor portfolio are below:

Benzene Europe, green, down 21%. ”Spot values have drifted down by up to $100/tonne over the course of October”
PTA China, down 15%. “Large-scale shutdown in the downstream PET sector where average operating rates fell to 55% capacity because of poor demand amid a low season”
Brent crude oil, down 3%
Naphtha Europe, down 2%. “the arbitrage window to Asia has opened wide, prompting high-volume exports to the region and relieving oversupply”
HDPE USA export, up 16%. “Participants expect prices to fall in the next few weeks as producers begin to release more material into the export market”
US$: yen, orange, up 12%
S&P 500 stock market index, purple, up 20%

Shell, Bayer, Tullow to speak at World Aromatics conference

BrusselsNext month’s World Aromatics and Derivatives Conference in Brussels has a range of top-name speakers discussing key issues for the markets.

Co-organised as always with ICIS, it features:

Shell:  Global strategy manager Herbert Le Lorrain will present Shell’s new scenarios for the future, ‘Mountains and Oceans’

Bayer MaterialScience: New procurement head Christian Buhse will provide his first impressions of global benzene and toluene markets

Tullow Oil: Oil marketing manager Ben Holt will share the insights of this fast-growing company on the crude oil market

Styrolution:  Global product manager Brian Torrez will outline challenges and opportunities for the styrene market

Equipolymers: Commercial Director Antonello Ciotto will describe how the PET industry is meeting new requirements from brand managers

Avestra: CEO Adam Popov will provide an overview of Russia’s phenol/acetone market developments

In addition, Andrew Horncastle of leading consultants Booz & Co will describe the impact of latest refining industry developments on the aromatics markets.  Whilst Stewart Hardy of industry experts Nexant will review the outlook for the paraxylene chain.

The blog will also present two papers.  ‘Life as a by-product’ will look at the benzene outlook.  Whilst ‘Aromatics and Derivatives in the New Normal’ will discuss how age range and income levels will be key to future industry success.

Sponsored by Integra, the Conference has become a key event for the global industry, and provides an ideal networking opportunity.  Please click here for registration, and the full agenda.

Prices rise whilst demand falls

D'turn 10Aug12.pngThe blog is extremely concerned about recent market developments.

Nobody minds higher prices, if they are a response to strong demand and can be passed through to customers. But today’s high prices have nothing to do with strong demand. On the contrary, in fact. Most consumers are actually reducing output.

Equally, the wider economic outlook continues to weaken:

• European demand is very weak in most key industries. Auto sales are already 7% below 2011 levels, and seem likely to fall further
• US demand is slowing, as monitored by the ACC’s new Barometer, whilst policymakers are focused on the upcoming Presidential election
• China’s demand for products such as polyethylene is below 2011 levels. Yet leadership changes underway have created a power vacuum

Financial markets, however, have once again bid up crude oil prices in the mistaken belief that demand is ‘about to recover’. Yet anyone on the ground could tell them this was mistaken. All that is happening is that buyers are again rushing to cover short-term needs as crude rises.

Another reason for concern is that these moves are taking place in very thin August markets. Many executives are either on the beach, or otherwise away from their desks. They will be horrified by what they find on their return. Hence the blog’s own concern.

Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments, are below:
PTA China down 24%. “Supply shortage was caused by three typhoons which struck China’s east coast”
HDPE USA export down 22%. “Material remaining in short supply”
Naphtha Europe down 16%. “Between 500kt-700kt from NWE and the Med are set to arrive in Asia during August/September”
Brent crude oil down 10%
Benzene NWE down 3%. “The bullishness for benzene in recent months has seen styrene producers cut back operating rates due to poor economics”
S&P 500 Index up 3%

Computers push oil prices higher, again

WTIvS&P Aug12.pngTrading volumes in financial markets are very low these days. Many ordinary investors are on holiday, and others are focused on the Olympics. So it is easy for the high-frequency computers to create major volatility – and large profits for their owners.

Thus they managed to create a 1.5% fall in the S&P 500 on Thursday,and a 1.9% rise on Friday. But there was no real ‘news’ to drive the market. Thursday’s fall was due to ‘disappointment’ over the lack of immediate action by the European Central Bank (ECB). But as Reuters had already noted, a number of key steps have to occur before the ECB can act:

• Spain has to formally request ECB help – something resisted till now
• Euro leaders have to allow the bailout fund buy bonds at auction
• The German Bundesbank must agree
• Germany’s Constitutional Court must also agree

The first 2 items are likely to occur. Spain will find it better to ‘lose face’ than go bankrupt. Whilst politicians see ECB action as ‘easier’ than making painful decisions on spending cuts themselves. But the German position is less easy to read, although the computers were optimistic on Friday.

The Bundesbank is so far resisting the proposed deal, whilst the Constitutional Court ruling on the legality of bond-buying is not due till 12 September. Neither can be taken for granted. The price of agreement is to effectively commit Germany to unlimited costs in defence of the euro.

This volatility also has real-world impact. As the chart shows, it is allowing the ‘correlation trade’ to continue to operate. The computers work on algorithms, and push up the prices of all financial assets together:

• S&P 500 (blue line) moves are mirrored by WTI (green) and Brent (red)
• Thus Friday’s S&P 500 rise also added $3 – $4/bbl to oil prices

In the real world, this simply makes life even worse for companies and consumers. Oil prices have been in the demand destruction zone for over 2 years now. When the reckoning finally comes, it could be very painful indeed.

Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments, are below:

PTA China down 25%. “Production cutbacks in Taiwan, South Korea and Thailand, which began in early June, continued in August because of negative margins”
HDPE USA export down 22%. “Global demand was easing, with many countries buying only as much material as they need
Naphtha Europe down 19%. “Demand is still increasing from the petchem sector, as the propane-naphtha price spread currently favours naphtha.”
Brent crude oil down 15%
Benzene NWE unchanged. “An ongoing lack of material”
S&P 500 Index up 2%

Financial markets hope for more policy ‘lunacy’

D'turn 27Jul12.pngThe last few days have seen financial markets rallying, whilst the news from the real economy gets worse. US GDP growth in Q2 was just 1.5%. And the Wall Street Journal notes the recovery since 2009 has been the weakest in the post-War period.

But that doesn’t matter to the computerised trading systems that now dominate financial markets. Their owners simply hope this bad news will encourage policymakers to provide them with more firepower for their high-frequency trading, via further stimulus efforts.

The chart shows the periods (yellow arrows) of QE1 from March 2009, QE2 from August 2010 and Operation Twist from August 2011. These have led to enormous trading profits in financial markets. But by also increasing oil prices to record levels, they have destroyed any prospect of a recovery in consumer demand.

As the great scientist Einstein wisely remarked, a good definition of lunacy is to repeat the same action, and expect different results. Clearly the 3 rounds of quantitative easing have so far failed to produce a meaningful recovery. So why should a 4th be any different?

Meanwhile in the real economy Dow CEO, Andrew Liveris, spelt out the key issues in his H1 report on Thursday:

“The new reality is that this world is not in a normal growth mode, and it does not appear that we will see this for at least 12-24 months. The global GDP will struggle to get close to 3% in the next 12-24 months on a sustained basis.”

On China, his outlook was even more sobering, as he warned that its GDP was now “Probably running at very low numbers right now, a 3%, 4%, 5% number at best.”

BASF chairman, Kurt Bock, was similarly downbeat when reporting. Their results were supported by the Oil and Gas business. But Bock warned that BASF had abandoned hope of “an upturn in demand in H2” and he forecast global GDP at just 2.3% – essentially, recession level. Equally, in Asia he warned that:

“Q2 sales decreased – as they did in Q1… (whilst) volumes in China had been flat in Q1 and Q2, a sharp contrast to previous quarterly growth. No-one can tell when business will pick up again. Customers were acting very cautiously, and continue to reduce inventories to the very minimum.”

Maybe, one day, policymakers will realise it is today’s changing demographics that are driving the changes underway in the global economy. Until then, they will continue to treat symptoms, not causes.

Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments, are below:

HDPE USA export (purple), down 26%. “Prices were notionally higher, with material in short supply”
PTA China (red), down 26%. “China’s polyester demand improved this week, driven by firmer feedstock prices”
Naphtha Europe (brown), down 24%. “The market lengthened this week as demand remained lacklustre, and opportunities to move surplus stock out of Europe were reduced as the arbitrage to Asia remains closed.”
Brent crude oil (blue), down 16%
Benzene NWE (green), down 1%. “Europe remains undersupplied, with many units underutilised. Low cracker rates have ensured that pygas remains limited, further curtailing supply”
S&P 500 Index (pink), up 2%

‘Waiting for Bernanke’ is hottest show on Wall Street

D'turn 20Jul12.png‘Waiting for Godot’, the great play by Irish writer and Nobel Literature Prizewinner, Samuel Beckett, deals with the meaning of existence. Written just after the Second World War, its two characters wait endlessly for the arrival of Godot.

US financial markets are currently staging their own version of the play:

• They no longer see their role as providing new investment to enable companies to build their businesses for the future
• Today, they are operating in reverse. Companies are not raising new money, but are instead returning it to investors via share buybacks
• Remarkably, as the Financial Times notes, in recent years “companies have become the only net buyers of shares
• Markets have thus become casinos, where the main players are the high-frequency traders, for whom tomorrow seems a lifetime away

This, of course, is a major reason for the slowdown in the wider economy. Cash used to fund buybacks cannot fund the investment in Research & Development and factories required to provide future growth.

Even worse, it means markets have become ever-more dependent on injections of short-term cash. Since the crisis began, they now look to the Federal Reserve’s August meeting in Jackson Hole, Wyoming, for news of further support:

• In 2010, Fed Chairman Bernanke introduced the $600bn QE2 program
Last year, he indicated they would add $400bn via Operation Twist

Liquidity bubbles need ever-increasing amounts of cash if they are not to burst. So last month, the Fed was forced to add another $267bn via an extension of Operation Twist. But this has only enabled the S&P 500 and Dow Jone Index to stabilise, as traders know the extra money will soon be used up.

Thus ‘Waiting for Bernanke’ is the hottest play in US financial markets at the moment. If, like Godot, he does not appear this time, then the audience risks being mighty disappointed.

Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments, are below:

HDPE USA export (purple), down 28%. “Prices were stable to slightly higher, with material in short supply”
PTA China (red), down 25%. “China’s polyester demand improved this week, driven by firmer feedstock prices”
Naphtha Europe (brown), down 21%. “The fundamentally weak European market continues to gain support from the stronger Asia market”
Brent crude oil (blue), down 16%
S&P 500 Index (pink), no change
Benzene NWE (green), up 3%. “There was a general sense both in Europe and the US that the market had become overheated”