The litmus test for the global economy

European ethylene volume at 1998 low

C2 OR% Sept12.pngEuropean olefin markets had a miserable time in Q2. As the chart shows, based on APPE data, ethylene production (red square) was just 4.7MT. This was the lowest Q2 volume since 1998.

Of course, crackers had switched severity to produce more propylene and butadiene. But even propylene volume at 3.6MT was the lowest Q2 volume since 2002. Whilst butadiene volumes of 0.5MT were back at 2008’s level.

The reason was the low cracker operating rate of 80%. Only H1 2009 was lower in recent years, This was due to the combination of low refinery operating rates, slowing end-user demand and high feedstock prices.

Since 2009, we have essentially been in a stop-start cycle where:

• Prices rise because of rising oil and feedstock prices
• Buyers rush to buy forward to protect margins
• Oil prices stabilise, so buyers destock again
• And then the cycle starts once more

But each upswing is weaker than the last, as end-user demand slows still further. Consumers have very little spare cash, after paying for higher heating and transport costs. So they can only afford essential products.

Sadly, policymakers completely fail to make this critical connection. As one senior central banker told the blog recently, they believe that ‘there is always demand’. But as olefin markets demonstrate, the result of their policies is actually to make today’s problems worse, not better.