US ethylene prices near all-time lows as over-capacity arrives

US ethylene spot prices are tumbling as the major new shale gas expansions come on line, as the chart based on ICIS pricing data confirms:

  • They began the year at $617/t, but have since more than halved to $270/t on Friday
  • They are only around 10% higher than their all-time low of $240/t in September 1998
  • WTI crude oil was then $15/bbl and ethane was $0.15c/gal
  • On Friday, WTI closed at $70.5/bbl and ethane was $0.25c/gal

The collapse in margin has been sudden, but is hardly unexpected.  It is, of course, true that downstream polyethylene plants associated with the crackers were delayed by the hurricanes.  So ethylene prices may recover a little once they come online.  But unfortunately, that is likely to simply transfer the problem downstream to the polymer markets.

The issue is shown in the second chart, based on Trade Data Monitor data:

  • It shows annual US net exports of polyethylene since 2006
  • They peaked in 2009 at 2.6 million tonnes as China’s stimulus programme began
  • China’s import demand doubled that year to 1 million tonnes, but then fell back again
  • Net exports have actually fallen since 2016 to 1.9 million tonnes last year

The problem, of course, was that companies and investors were fooled by the central bank stimulus programmes.  They told everyone that demographics didn’t matter, and that they could always create demand via a mix of money-printing and tax cuts.  But this was all wishful thinking, as we described here in the major 2016 Study, ‘Demand – the New Direction for Profit‘, and in articles dating back to March 2014.

Unfortunately, the problems have multiplied since then.  President Trump’s seeming desire to launch a trade war with China has led to the threat of retaliation via a 25% tariff on US PE imports.  And growing global concern over the damage caused by waste plastics means that recycled plastic is likely to become the growth feedstock for the future.

In addition, of course, today’s high oil price is almost certainly now causing demand destruction down the value chains – just as it has always done before at current price levels.  People only have so much money to spend.  If gasoline and heating costs rise, they have less to spend on the more discretionary items that drive polymer demand.

COMPANIES HAVE TO REPOSITION FAST TO BECOME WINNERS IN THIS NEW LANDSCAPE As I suggested with the above slide at last month’s ICIS World Polymers Conference, today’s growing over-capacity and political uncertainty will create Winners and Losers:

  • Ethylene consumers are already gaining from today’s lower prices
  • Middle East producers will gain at the US’s expense due to their close links with China
  • Chinese producers will also do well due to the Belt & Road Initiative (BRI)

As John Richardson has discussed, China is in the middle of major new investment which will likely make it a net exporter of many polymers within a few years.  And it has a ready market for these exports via the BRI, which has the potential to become the largest free trade area in the world.  As a senior Chinese official confirmed to me recently:

“China’s aim in the C2/C3 value chains is to run a balanced to long position. And where China has a long position, the aim will be to export from the West along the Belt & Road links to converters / intermediate processors.”

The Losers will likely be the non-integrated producers who cannot roll-through margins from the well-head or refinery.  They need to quickly find a new basis for competition.

Luckily for them, one does exist – namely the opportunity to develop a more service-led business model and work with the brand owners by switching to use recycled plastics as a feedstock.  As I noted in March:

Producers and consumers who want to embrace a more service-based business model therefore have a great opportunity to take a lead in creating the necessary infrastructure, in conjunction with regulators and the brand owners who actually sell the product to the end-consumer.”

Time, however, is not on their side.  As US ethylene prices confirm, the market is already reacting to the reality of over-capacity.  H2 will likely be difficult under almost any circumstances.

The industry made excellent profits in recent years.  It is now time for forward thinking producers – integrated and non-integrated – to reinvest these, and quickly reinvent the business to build new revenue and profit streams for the future.

The post US ethylene prices near all-time lows as over-capacity arrives appeared first on Chemicals & The Economy.

Populism rises as global dynamics drive market shifts

Populists Nov16

We are living in a New Normal world.  Populists such as Nigel Farage, Donald Trump, Marine le Pen and Beppe Grillo are gaining support as economic growth slows and social/political unrest becomes common.  My presentation at our annual conference last week in Vienna highlighted some of the key issues, as Jessie Waldheim of ICIS news reports.

VIENNA (ICIS)–Markets face a period of increased volatility as political and demographic changes result in a paradigm shift from globalisation to sustainability as the driver for chemical markets, the chairman of consultancy International eChem said on Tuesday.

“The world is at a tipping point,” said International eChem chairman Paul Hodges. “Everything we’ve known, everything we’ve lived with for the last 50-70 years is now changing.”

In 1987, then US president Ronald Reagan stood in front of the Berlin Wall in Germany and demanded that it be torn down. In 2017, US president-elect Donald Trump is expected to build a wall.  In Europe, the Brexit vote for the UK to leave the EU and the upcoming referendum in Italy could cause further turmoil for the EU.

These political changes are being driven by demographic changes which are also going to effect petrochemical and other markets. Essentially, as life expectancies have increased and birth rates have lowered, a larger percentage of populations are older.

US consumer Nov16For example, as the second chart shows, the number of US households in the 25-54 age bracket has been steady while the number in the 55-and-up age bracket has risen by nearly 50%. The older households tend to spend less money, having already made most major purchases.

This is in contrast to recent decades, when major population growth in the younger age brackets drove global demand.  ”We don’t have lots of young people, so you don’t need as much stuff,” Hodges said, speaking at the 15th annual World Aromatics & Derivatives Conference in Vienna, Austria.

According to figures from the American Chemistry Council, we’re seeing a drop-off in capacity utilisation, which is the “best single predictor we have” of global GDP, Hodges said.  With the capacity utilisation numbers in September 2016 nearly as low as in 2009, we’re likely to see a global recession next year, he added.

Our economy has not yet adapted to the new demographics. This adaptation will mean uncertainty and political risk.  ”We’re seeing the rise of protectionism. Sustainability is replacing globalisation,” Hodges said.

Trump has said he has plans to declare China a currency manipulator and to withdraw from or renegotiate trade deals. The Brexit vote is part of this same paradigm shift. “We need to be planning for this,” Hodges said.

Specifically for aromatics markets, benzene price spreads have already come down. Benzene is a byproduct and refineries don’t increase production when benzene is tight and won’t slow production if less benzene is needed. ”We’ve seen benzene below naphtha before. We could see benzene trading below naphtha again,” Hodges said. “We have to accept the volatility is there.”

Companies will need to consider how trade flows will change with China no longer the major importer and manufacturing capital of the world. And companies will need to consider inter-polymer competition from lower polypropylene prices.  Businesses models will have to change and restructuring will be inevitable.

Key chemical hubs will have to be made more robust, and being near customers may become more important, Hodges said.  With the change comes opportunities. For instance, businesses could focus on designing solutions with new materials or by repurposing materials already in the market.

“Aging populations are an opportunity. Why are we not developing new services and products for them?” Hodges said.

Chemical capacity utilisation continues to weaken

ACC OR Jan16Capacity Utilisation (CU%) is the best measure we have for the current state of the global chemical industry.  It doubles as an excellent proxy for the outlook for the global economy.  And as the above chart based on latest American Chemistry Council data shows, recovery still seems a long way off:

  • Global CU% was down to 81.4% in November, versus 82% in November 2014 and 82.4% in November 2013
  • The only bright spot was in Central/Eastern Europe, up 9.2% versus 2014: Russia was up 14%
  • Asia is showing some signs of recovery under the influence of cheaper oil, up 4.9% versus its 7.5% peak
  • Middle East is also recovering, up 4.4% versus its 6.1% peak, as countries focus on petchem exports
  • W Europe was up 2.8% versus its 4.1% peak, N America was up only 2.2% versus its 5% peak
  • Latin America remains in crisis, setting a new low at -3.4%, with Brazil at – 4.3%

Sometimes November can disappoint as companies reduce inventory before year-end, but there was little sign of this happening in 2015.  Many companies had in fact been convinced by the analysts that oil prices would rebound, and so there was actually some panic buying.  This has no doubt led to some regrets, with oil now back at 2004 lows and still weakening as US and Iranian exports ramp up.

Pressure is also rising in Asia from the increase in China’s oil product exports.  November data showed:

  • Gasoline exports up 10% so far this year at 5m tonnes; jet kero exports up 17% at 11m tonnes
  • Fuel oil was up 12% at 9.3m tonnes; and diesel up 64% at 6.2m tonnes

Naphtha and LPG saw imports rise; naphtha was up 79% at 5.7m tonnes and LPG up 69% at 10.6m tonnes.  But these increases effectively meant that  China was also boosting its own petchem production – not only reducing its potential need for polymer/PTA imports but also increasing its petchem export potential.

January will be a critical month as Western countries return from the holidays.  This will give us some insight into likely demand trends in Q1, which are normally very strong for seasonal reasons.  But Asia will, of course, be slowing ahead of Lunar New Year on 8 February.

 

US polyethylene and PVC exporters focus on margin, not volume

D'turn 30Nov13

2013 has seen 3 types of markets develop for the blog’s IeC Downturn Monitor portfolio as the chart above shows:

  • Financial assets such as the S&P 500 (purple) have soared, as did the US$ against the yen (orange)
  • Crude oil (blue) and naphtha (black) tried to follow, but found it difficult to pass though the higher prices
  • Benzene (green) and PTA (red) have struggled with weak demand and high feedstock prices

The anomaly has been US polyethylene (yellow), where prices have stayed relatively strong as producers chose to focus on margin rather than volume.

US PE, PVC Dec13aThis might seem a strange decision, given they enjoy a major feedstock cost advantage on ethylene due to shale gas.  But it makes perfect sense when seen against the limited potential for selling additional export volumes.  As the charts above show, based on trade data from Global Trade Information Services, there is really little scope for selling more PE or PVC (the main derivatives):

  • Total PE net volumes are up 16% (blue column) versus 2011 (red) this year due mainly to a 26% increase to Latin America
  • This region now takes three quarters of US net exports, as the percentage of sales to Asia has halved
  • Total PVC net sales are up just 7% this year versus 2011, and flat versus 2012 (green)
  • Exports are focused on Turkey, Mexico, Russia and Egypt: Asian volumes have also dropped versus 2011-12

This message does not yet seem to have got home to investors.  They look at the raw data, and see just rising volumes and high margins.  So they imagine that the world, and Asia in particular, are just waiting for additional volumes to appear.

What they miss is that Asian and LatAm countries are busy expanding their own production as fast as possible, so as to create jobs.  They also forget that China’s slowdown is also now impacting Latin America’s demand.  Equally, they overlook the fact that Brazil’s vast increase in PVC imports (double 2011 levels) and in PE (up 34%), is mostly a one-off bonus due to preparations for the soccer World Cup and the Olympics.

The operating managers with whom the blog talks understand all this very well.  Some have special grades of PE that currently cannot be supplied by domestic competition in the importing countries.  But most appreciate there is little point trying to sell additional volume, as this would merely lead to a price war and lower margins.  They also know, unlike investors, that exporting additional volumes – if major new capacity is built – will be very hard indeed.

The chart shows latest portfolio price movements since January 2013 with ICIS pricing comments below:

PTA China, red, down 17%. “Downbeat market outlook for the downstream polyethylene terephthalate (PET) and polyester fibre demand”
Benzene Europe, green, down 14%. “Players are generally in the midst of running down inventories ahead of year-end rather than building stock.”
Brent crude oil, blue, down 1%
Naphtha Europe, black, up 3%.  “European arbitrage window to Asia is well and truly shut, but domestic petrochemical demand will continue to prop up prices as crackers minimise the use of the more expensive alternative feedstock propane”
HDPE USA export, yellow, up 13%. “Limited trade in the week shortened by the US Thanksgiving holiday.
US$: yen, orange, up 16%
S&P 500 stock market index, purple, up 23%

Crude oil’s slide puts markets under pressure

Brent Apr13.pngCrude oil markets long ago lost their role of price discovery. Since early 2009, they have instead been dominated by pension funds seeking to find a ‘store of value’ as the US$ weakened, along with hedge funds enjoying a money-making ‘momentum play‘. The reason has been the $tns spent by western central banks in their liquidity programmes. As the chart of Brent prices shows, each new programme has pushed oil prices higher:

• The G-20 meeting in April 2009 stopped them stabilising in their historical $10-$30/bbl range, to which they had just returned after the 2005-8 financial bubble
• QE2 stopped the downturn underway in the summer of 2010 and sent prices higher again
• Twist in 2011 and then the European Central Bank (ECB) in 2012 had the same impact
• Now the Bank of Japan (BOJ) has launched its own, equally large programme

However, the BOJ has a slightly different agenda. It aims to devalue the yen, not the US$. And the yen has already fallen close to $1: ¥100 compared to $1: ¥93 before the new policy was launched on 4 April. If it succeeds, then clearly US pension funds will have no further reason to buy crude oil. And so prices could easily start to reconnect with fundamentals. At the same time, the S&P 500 could continue to rise, as yen-based investors seek their own ‘store of value’.

The fundamentals are dreadful, as the blog will discuss in more detail tomorrow. So without pension and hedge fund support, prices could easily return to $50/bbl, and then decline back to their historical trading range. This would also return them to the traditional relationship with US natural gas prices. Whilst this is currently regarded as ‘impossible’, the blog has always seen ‘reversion to the mean‘ as its favourite investment strategy.

Meantime, of course, chemical markets are locked in ‘wait and see’ mode. Q2 has not seen any major increase in demand, so buyers are reluctant to push purchase prices lower as this would merely devalue their own inventory. Similarly producers long ago abandoned hopes of gaining market share, and are content to maintain the status quo.

If oil prices start to slide, however, these dynamics will clearly change. Naphtha fell a further 6% last week, and is now down 14% on its high a month ago. This is an astonishing move, at a time of supposedly peak demand, and highlights the potential weakness ahead as we go into the quieter summer months.

Benchmark price movements since the IeC Downturn Monitor’s April 2011 launch and latest ICIS pricing comments are below:
Naphtha Europe, down 28%. “1-1.1MT of deep-sea naphtha supply will land in Asia in May”
PTA China, down 20%. “Downstream polyester yarn, fibre and PET bottle chip demand are at their peak season in April-May”
Brent crude oil, down 16%
HDPE USA export, down 13%. “One trader believed that prices would begin to fall soon as producers realize their prices are attracting little interest from global buyers”
Benzene NWE, flat. “Domestic market was still relatively quiet and thin”
S&P 500 stock market index, brown, up 17%

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%