Chemical industry operating rates fall as oil prices rise
on November 26, 2012

Brent Nov12a.pngThe battle between the major central banks and the fundamentals of supply/demand is starting resemble the battlefields of the 1st World War. The generals running the campaign believe (with the exception of the Bank of Japan) that today’s crisis is simply due to a lack of liquidity. They ignore the impact of demographics and the ageing of the Western BabyBoomers.

Their chosen weapon has therefore been the supply of large amounts of cash to financial markets. Their aim has been to increase asset values, in the belief that this will increase consumer confidence. Unfortunately as in 1914-18, it is the ordinary soldiers – in this case, consumers – who suffer from their mistake:

• Most consumers have relatively low incomes and have to buy real things
• Higher asset prices mean their cost of gasoline, diesel, cotton, coffee etc rises
• The cost of these increases means consumers have no discretionary cash left

As the chart shows, the central banks are also getting less bang for the $tns that they are spending to support asset prices. The latest round of QE3 since the summer has reversed the fall in crude oil prices. But it has only taken it back into a new triangle formation.

The chart, along with common sense, is telling us that higher prices in financial markets do nothing for consumer confidence. In fact, the reverse is true as most consumers do not own stocks, and so they end up worse-off financially than before.

Thus the chemical industry, dependent as it is on consumer spending, takes the pain. Data from the American Chemistry Council shows:

• US operating rates (OR%) ware just 76.6% in October, down from 77.6% in 2011 despite the continuing boost from shale gas
• Worldwide, September’s OR% was only 84.8%, versus 87.3% in 2011 and the 91.2% long-term average.

The chart shows benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments below:

HDPE USA export, purple, down 22%. “Global demand remained weak, with China still uninterested in buying”
PTA China, red, down 17%. “Downstream textile factories are sitting on high product inventories”
Naphtha Europe, brown, down 16%. “Refining margins are heading deeper into negative territory as already-lacklustre demand declines further”
Brent crude oil, blue, down 11%
Benzene NWE, green, up 6%. “Spot activity in Europe remained relatively thin”
S&P 500 stock market index, pink, up 3%

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