Thank goodness for Janet Yellen, and China’s provincial governments. That was clearly investors’ thoughts, when they bid up chemical company share prices during Q1. For as the chart above shows, there was nothing in the fundamentals of supply and demand to suggest economic recovery was finally underway. Instead, the latest American Chemistry Council data shows that global capacity utilisation fell to 80.1% in March – a new low for the current cycle.
However, the US Federal Reserve’s sudden “discovery” in early Q1 that the US economy wasn’t recovering as expected – Q1 GDP was just 0.5% and inflation only 0.1% – led investors to assume interest rates were unlikely to rise during 2016 as the Fed had promised:
- Instead, they sold the US dollar and bought commodities such as oil
- This repeated the “store of value” trade that proved so profitable until mid-2014
- And China’s panicking provincial governments stoked the rally even further
- Their lending soared to otherwise-bankrupt companies, as they battled Beijing’s efforts to restructure the economy
Oil prices thus repeated the 50%+ rally seen this time last year, causing downstream companies to panic and restock heavily. This was very good news for chemical company profits, and for investors’ share/debt portfolios. But as my quarterly summary of company results shows below, company managements were more realistic about the outlook.
Some product areas, such as polyolefins, did very well. And US company earnings were boosted by the temporary rise in the cost advantage of their gas-based feedstock. But many companies reported customer resistance to rising prices, suggesting volume was being driven by the restocking phenomenon rather than underlying demand growth.
Those companies such as Arkema who have embarked on long-term portfolio transformation efforts may well prove to be the real Winners over time, once markets recover from their excitement over the dollar’s weakness.
Arkema. “Internal momentum sustained by transforming investments which continue to ramp up”
Asahi Kasei. “Decreased prices of petrochemical products”
Air Products. “Economic conditions in the quarter “challenging”, weak manufacturing environment”
Axiall. “Worsening conditions for chlorvinyls operations”
BASF. “Lower selling prices to customers as the decline in raw material prices filtered through”
Borealis. “Very strong margins in the polyolefins business”
Braskem. “Resin consumption in Brazil during the quarter declined 18% compared with the same period last year”
Chemours. “We realized over $40m of transformation plan savings”
Clariant. “Increasingly challenging economic environment”
Covestro. “Positive effect of lower raw material prices, which outweighed the impact of lower selling prices and volumes”
Dow. “Record Q1 for polyethylene sales, driven by demand from North America and Asia Pacific”
Eastman. “Drop in chemical intermediates”
Evonik. “All divisions posted falling revenue apart from Resource Efficiency”
ExxonMobil. “Capturing increased specialty and commodity product demand along with significant cost benefits from both gas and liquids cracking advantages at our integrated sites.”
Hexion. “Selling prices were lower because of declines in prices for oil-based feedstocks”
Honeywell. “We will be be cautious in our sales planning, plan costs and spending conservatively”
Huntsman. “Lower cost of goods sold”
Kronos. “Average Q1 sales prices for TiO2 declined by 14% year on year”
LG Chem. “Improved margins at its petrochemicals business”
Lanxess. “Improved margins offset the decline in sales”
LyondellBasell. “A challenging environment for the rest of the year on the back of further maintenances as well as repairs”
Mexichem. “Difficult industry conditions”
Mitsui. “Prospects for demand growth in the chemical industry remains unclear due to the volatility of naphtha prices and exchange rates”
MOL. “Strong petrochemical margins”
OMV. “Strong polyolefin margins and an improved contribution from the base chemicals business”
PKN Orlen. “Expects downstream margins to weaken due to lower cracks on diesel and petrochemical products”
Phillips 66. “Weaker margins impacted our financial results in the first quarter”
PPG. “Higher volumes and cost control measures”
PTT. “Shutdown of a cracker and lower refining spreads”
Petronas. “Moving forward, the outlook for 2016 remains soft”
Praxair. “Volume headwinds primarily in the energy, metals and manufacturing end-markets”
Reliance. “Strong polymers demand and higher volumes in the polyester chain”
Shell. “Lower base chemicals margins in the US and sales volumes”
Repsol. “Higher petrochemical sales volumes”
Sherwin Williams.”Higher volumes driven by agricultural coatings demand”
Solvay. “Growth in 2016 will be “back-ended” compared to the “strong” first half of 2015″
Trinseo. “Lower raw material costs, unfavourable exchange rates and lower European sales in polystyrene”
Tronox. “Believe Q1 marked the turning point in the long decline in TiO2 pigment selling prices”
Unipetrol. “Petrochemical business was significantly affected by the shutdown of the cracker unit”
Univar. “Lower demand from the oil and gas market”
Vopak. “Sound market fundamentals for storage demand and infrastructure services”
Wacker. ““Low price levels for semiconductor wafers and solar silicon”
Westlake. “Lower selling prices for most key product lines”
What happens to your business, or your investments, if demand fails to return to the supply-driven Comfortable Middle Scenario forecast by consensus thinking? This is the question raised in our new Study, Demand – the New Driver for Profit (jointly produced by International eChem and ICIS). We suggest access to low cost feedstocks on their own is no longer enough to drive sales and profit growth.
Instead, we are going back to the world that existed before the BabyBoomer-led SuperCycle. 2 demand-led Scenarios challenge the supply-driven model:
- $25/bbl oil = Collapsing demand. Emerging markets submerge, and developed markets slow dramatically as stimulus-created debt has to be repaid
- $50/bbl oil = Comfortable middle. Stimulus policies prove to have worked, demand recovers, project cancellations and revived growth prospects create a balanced market
- $100/bbl oil = Continuing tension. Further central bank stimulus takes place as economic recovery stalls, and geopolitical risks rise, along with the potential for supply disruptions
These 2 Scenarios create major risk for your business. In polyethylene, for example, the Collapsing Demand scenario reduces demand by nearly 10 million tonnes by 2030, compared to the Comfortable Middle scenario, and by 14MT in the Continuing Tension scenario. Similar downgrades occur in other value chains – PP volumes reduce by 7MT and 11MT respectively; PTA volumes reduce by 10MT and 16MT.
A PARADIGM SHIFT IS UNDERWAY
Our core argument in the Study is that a paradigm shift taking place, where the markets are moving from being supply-driven to demand-led. Companies cannot any longer simply invest in new capacity on the assumption that demand will soon catch up. Clearly we cannot prove at this stage that our analysis is correct:
- Consensus thinking disagreed with our view from August 2014 that crude would return to $30/bbl – but it did
- It also disagreed with our view from 2013 that China would see a major slowdown due to President Xi Jinping’s New Normal policies – but it has
- Now, consensus thinking argues that everything will still be alright – oil will stabilise at $50/bbl, and China’s growth will just be a bit slower
What would happen if we were right again, this time with our paradigm shift argument?
We are delighted with the support that the Study has already received, and hope you will consider purchasing it. It focuses on the new opportunities for growth now opening up in critical areas for the future, such as in averting likely water and food crises. The polymer industry could generate major revenue and profit growth in these areas, if companies adopt new, demand-led, business models.
Please click here to download a copy of the Prospectus, and contact me at firstname.lastname@example.org for further information.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 65%
Naphtha Europe, down 61%. “Petrochemical demand steady, cracker margins lower”
Benzene Europe, down 59%. “Oil and energy dynamics impact supply and pricing fundamentals on benzene.”
PTA China, down 44%. “Producers who had enquiries from both domestic and regional buyers.”
HDPE US export, down 36%. “Expectations of tighter supply going into the heavy turnaround season in the second quarter also prompted the hike in exports”
¥:$, down 11%
S&P 500 stock market index, up 2%
The chemical industry is the best leading indicator for the global economy. The slide in operating rates (OR%) around the world during the seasonally strong Q2 period. is a clear warning that global economic growth may be stalling.
This should be a major wake-up call for anyone still hoping that growth may recover to the Boomer-led SuperCycle level. The latest update from the American Chemistry Council’s excellent weekly report makes sober reading:
- The global OR% was just 83.4% in June, down from 83.7% in June 2013
- This was well below the 92% long-term average between 1987-2013
- It was also well below the minimum 88% level seen in the SuperCycle
The chart also confirms last month’s comment from Dow CEO, Andrew Liveris, that “for a couple of years after 2008, we had a head-fake that the growth might have returned, but it didn’t”. OR% temporarily jumped to around 87%, but then fell back again – despite massive continued stimulus by governments and central banks.
The ACC report also highlights that “growth stalled in Q2“. Yet it should be the seasonally strongest quarter of the year:
- Global growth rates fell from 4.8% in March to 3.5% in June
- In the US, the ACC report that “production of basic chemicals fell” in June, despite the shale gas cost advantage
- Latin America collapsed from 1.4% growth in March to a fall of 2.9% in June
- W European growth halved from 3% in March to 1.4% in June, with Germany falling from 4.3% to a negative 0.9%
- Central/Eastern Europe fell from 1.6% in March to a negative 0.1% in June, with Russia falling to a negative 2.9%
- Asia-Pacific fell from 8.3% in March to 6.8% in June, with India collapsing from 6.5% to a negative 0.4%
Outside the chemical industry, the data also points in the same direction:
- US GDP growth has been just 2.3% over the past 2.5 years, after inventory build is discounted
- This is less than 1% per year, despite $10tn of stimulus
- China’s steel demand grew just 0.4% in H1 this year, according to the official steel association. Rail freight actually fell 1.4% in June versus June 2013
- This confirms, if confirmation was needed, that China’s reported GDP growth of 7.5% was pure fiction
- As China’s Academy of Social Sciences warns: “The current situation serves as a reminder of how defective and unsustainable our growth model is. There can be no delay in altering the traditional investment- and export-driven model “
The same realisation also seems to be dawning in financial markets, which have only been held aloft by a wave of debt. Now investors will have to wake up to the fact that most of the debt will never be repaid.
Companies need to recognise that we have all been the victims of a collective delusion, and rapidly change course before it is too late:
- They need to abandon their ambitious growth strategies and instead prepare for tough times ahead
- Those in Asia can no longer ignore China’s change of course
- It is becoming an exporter of many products, rather than an importer, in order to maintain employment
- Companies also need to review the $123.5bn of new US shale gas-related projects, as most will prove unprofitable due to lack of demand.
Q3 is the time when budgets and strategies are set for the next few years. So it is not too late for a change of course.
Otherwise, in 5 years’ time, when all this new capacity is online, new managements will scratch their heads and wonder how the industry maintained the collective delusion for so long. But by then, the money will have been spent.
WEEKLY MARKET ROUND-UP
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
Brent crude oil, down 3%
US$: yen, down 2%
Naphtha Europe, down 2%. “Cheap propane stocks are eating away naphtha’s market share in the petrochemical sector”
PTA China, up 1%. Producers offered cost-linked formula to stem losses, but buyers face difficulties in passing down the additional costs to their customers”
Benzene, Europe, up 5%. “Prices reversed course amid limited downstream appetite for further increases in August, which is traditionally a slow month because of summer shutdowns and the holiday period across Europe”
S&P 500 stock market index, up 5%
HDPE US export, up 7%. “Some higher trades were heard, and material remained in tight supply”
Operating rates (OR%) rose to 84% in the global chemical industry in April, according to data from the excellent American Chemistry Council (ACC) weekly report. As the chart shows:
- This was back at January’s rate, after 83.6% in February and 83.7% in March (orange line)
- But rates are still below the minimum 88% rates seen in the SuperCycle (red)
- And they are a long way below the long-term average of 92% between 1987 – 2013
The key is the move into today’s New Normal of lower demand growth. The blog has added a red line to the ACC graph, showing the lowest OR% seen during the SuperCycle. at around 88%. Since 2009, OR% have never managed to reclaim this level, with the initial post-Crisis rally running out of steam in 2011.
Also interesting is that OR% growth was only up 1.3% in N America, despite the shale gas cost advantage. This is yet further confirmation that lowest cost is now no longer the key driver for OR%. Instead the highest growth was seen in China, up 11.1%. This highlights China’s move into export markets, to replace slowing domestic demand, as the blog has identified in core products such as PVC and PTA.
The ACC also report that global chemical industry production is only up 14.6% today versus average 2007 levels, again confirming the lacklustre nature of the recovery despite the $33tn of policymaker stimulus. April data shows that relatively strong areas included coatings, consumer products and pharmaceuticals, whilst inorganic chemicals, petrochemicals and plastic resins were weaker.
US specialty markets are seeing the same trends. ACC data for April shows production up just 8.9% versus average 2007 levels, and again the market seems to be finding it difficult to gain momentum:
- Total production was flat in April, with only 10 segments expanding compared to 23 in March
- 17 segments actually saw declining production, with 1 segment flat
- Adhesives & sealants and anti-oxidants remain the best performers, up around 10% versus 2013
- Paper additives and plasticisers are the laggards, down around 5%
The data continues to highlight how GDP growth is no longer an accurate guide to future growth levels. Companies who focus instead on age range and income level are likely to see the best results in future decades.
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
PTA China, down 5%. “Demand in the downstream polyester markets saw weaker sales, resulting in end-users being unable to pass down the additional cost to their customers”
Benzene, Europe, down 1%. “Rising crude prices led to higher global prices and a number of trades with short-covering said to be strong”
US$: yen, down 3%
Brent crude oil, up 1%
S&P 500 stock market index, up 6%
Naphtha Europe, up 6%. “Prices have spiked on a steep rise in upstream ICE Brent crude oil futures. Supply is less tight on a closed arbitrage window to Asia and increased imports from the US. Domestic gasoline blending demand is healthy, but this has been more than offset by slow petrochemical demanduted”
HDPE US export, up 7%. “Prices still slightly too high to really compete in the international market”
“Not with a bang but with a whimper”.
The blog’s 6-monthly webinar for the American Chemical Society (ACS) takes place next Thursday, 5 June, at 14.00 Eastern Summer Time. And once again, the ACS has kindly arranged for blog readers to register for it free of charge.
As feared in last December’s Year-end Review, the promised economic recovery has disappointed. US GDP instead actually fell 1% in Q1.
Key topics to be covered in this Thursday’s ACS webinar include:
- Is there enough demand to justify $100B+ of US shale gas investment?
- How will China’s new economic policies impact the world?
- Opportunities from rising life expectancy and falling fertility rates?
The blog will be joined on Thursday by Mark Jones of Dow Chemical Corporation, who will moderate the webinar. We will discuss the key issues and trends likely to impact in H2. And, of course, we will respond to questions from our audience.
The webinars are now in their 6th year, and continue to prove very popular. Please click here to register for next Thursday’s event.
The latest American Chemistry Council report on global production shows output was up 3% versus September 2012, and just 18% above average 2007 levels. There was a mixed picture in the main Regions:
- Asia-Pacific was strongest, up 5.9%, with Japan accelerating as the weak yen helped its exports
- The Middle East continued to slow, and was up just 1.6% – less than half of June’s 3.3% gain
- N America slowed to a 1.7% increase, continuing the weaker trend since 2011
- Central/Eastern Europe slowed to a 0.9% increase
- Western Europe slowed to a 0.3% increase, with only Belgium seeing strong growth
- Latin America saw further weakness, down 3.2%
Overall, therefore, as the ACC chart shows, capacity utilisation was 87.5%, well below the long-term average of 91%. The only good news is that recent modest new capacity increases, up just 2% versus September 2012, meant operating rates improved from last year’s 86.6% level.
The problem, of course, is that a large number of companies are now investing in major new capacity, in the belief that all the central bank stimulus effort will lead to a return to strong growth. But in fact, as the data shows, this capacity will find it very difficult to find a home.
A similar picture is shown in this week’s cover story in Chemical & Engineering News, the magazine of the American Chemical Society. Its latest employment survey is titled ‘Its Not Over Yet’, and describes how today’s ‘Slow economy has chemists still searching for work, and trying clever strategies to find it’.
Its main survey Still Waiting for Good Times includes analysis of the outlook by the blog – please click here to read the full article.