D'turn 9Mar12.pngAs regular readers know, the blog regards benzene as an excellent leading indicator for petchem markets and the global economy. Its track record since the start of the crisis in 2008 has continued to be strong.

The reason is probably two-fold:

• It is one of the oldest, and widely used, chemicals. In many ways it is therefore a proxy for industrial production.
• It is close to the feedstock end of the value chain. So it also responds to ‘correlation trade’ activity by the high speed computers that now dominate financial markets

As the chart shows, it provided early warning in December (yellow highlight) that another feedstock price surge was underway. This drove up other petchem markets as cost increases began to be passed through. The correlation trade also led to a major rally in global stock markets.

But the crucial issue with bear-market rallies is that the volume of trading usually fails to increase as prices rise. Instead of more and more buyers jumping into the market, activity remains subdued.

This has been the pattern of recent weeks. Equally, both crude oil and the US S&P 500 have stalled at the top of their trading range. Brent is still at $124/bbl, and the S&P 500 is at 1370. Neither has found new buyers willing to support the rally.

Meanwhile, ICIS pricing reports continue to suggest that end-user demand is slowing. Buyers seem to be simply protecting downstream margins by buying forward. There is no surge of new demand.

Thus benzene’s price fall last week (second highlight) is worrying. So are the reports from China on PTA demand. It never recovered after the Lunar New Year holiday, and now seems to have slowed further.

The blog would like to be wrong. It may be that this week’s slowdown will be quickly reversed. But for the moment, it suggests that – just as in 1973/4, 1979/80, 1990/1 and 2007/8 – today’s sustained high level of oil prices is leading to demand destruction on an increasing scale.

ICIS pricing comments and price changes since the IeC Downturn Monitor launch on 29 April are below:

PTA China (red), down 10%. “PTA demand is likely to drop as a number of downstream polyester yarn/fibre chip producers in China have either shut their plants or lowered their operating rates by 5-20%, starting from last week, to ease high inventory pressure and balance weak demand”
Benzene NWE (green), down 8%. “The market has grown increasingly detached from oil and energy movements, with supply/demand dynamics playing a larger role in driving direction”
HDPE USA export (purple), down 5%. “US Gulf export offers were higher, as producers continue to try to implement an increase of about 3 cents/lb for March. However, traders said they are purchasing very little material, because the prices are too high to work in other regions”
Naphtha Europe (brown dash), down 2%. “Demand for naphtha remains unexceptional, with no shortage of offers but little in the way of bids.”
Brent crude oil (blue dash), no change
S&P 500 Index (pink dot), no change