Quarterly Business Analysis Quarter 4 2008
PETROCHEMICAL PRODUCERS SUFFER FROM A LACK OF DEMAND
The slowdown in economic markets began to bite at the end of 2008 as petrochemical producers across the globe experienced a collapse in consumption. The slowing global economy and deepening financial crisis has also seen prices continue the slide which began in the previous quarter. Brent crude oil prices have fallen over $100 per barrel from the record highs earlier in the year to below $40 per barrel in December. In addition, with crude oil prices collapsing at this pace, value chains continued to de-stock as many consumers refrained from purchases with prices falling rapidly.
The U.S. is now officially in recession and growth in 2009 is now forecast by many sources to be very pessimistic. Meanwhile, GDP growth in Western Europe looks equally poor and, indeed, China’s growth forecast is also down markedly on previous years. The unemployment rate around the world is increasing and industrial production growth fell sharply this quarter. The worsening world economy has already impacted oil demand this year, and will be more prominent in 2009. OECD demand is forecast to show an average decline of 1.3 million barrels per day year-on-year in the first half of 2009.
United States Real GDP Growth Rate
(Annualised %)
The demand for petrochemicals is facing a very bleak economic environment. Major economies including the United States, Germany and the U.K have entered recession. The automotive sector, a key consumer of polypropylene resins has been severely impacted. New car sales in November were reported down by 37, 29, and 18 percent in U.K., Italy, and Germany, respectively, in comparison to the same period in 2007; and even Toyota has now announced it is struggling, reporting its first annual loss in over 70 years. With so many growing problems in the downstream industrial and consumer sectors, it is no surprise that consumption of many commodity petrochemicals has been very poor.
Naphtha prices have been at record low values this quarter, trading at a highly unusual discount to crude oil as reformer and cracker operations were cut back. Despite this apparent feedstock advantage, many naphtha crackers either ran at reduced operating rates or were closed temporarily as non contractual demand evaporated.
Following the early settlement of West European olefin contracts falling naphtha values, ample supply and weak demand saw naphtha cracking margins more than double but it is questionable how much material has been sold at these levels with European crackers running at historically low rates. Another indicator of the slow demand was spot pricing. Spot prices have fallen sharply during the fourth quarter on the back of weak crude oil prices and poor demand. The delta between West European contract and spot ethylene prices has grown dramatically over recent months rising from just over $100 in July to around $600 in October and over $800 in November.
The polymer sector was hit hard, with polymer prices collapsing in the fourth quarter as economic slowdown and tumbling oil prices heavily impacted the industry, and in Western Europe in particular failing to find any support from the ethylene contract price. Integrated margins have meanwhile been artificially supported by cracker co-product credits, which in appearing to make cracker operations very profitable have provided a very misleading picture this quarter. The near record high integrated economics for polyethylene producers have contributed to the downwards pressure on polymer prices.
LLDPE Value chain Prices
(West European Monthly average)
The PET industry is another example of an industry sector hit by seasonal low demand. This only contributed further to an already desperate market situation. Consumption fell significantly lower than in 2007, exposing the weakness in an industry which has hitherto been protected by substantial year on year growth. The plummeting price of oil has fed rapidly down through the PET chain, causing all parties to minimise inventories, but causing substantial losses through inventory devaluation to those participants who were unable to liquidate their stocks.
ChemSystems cash margin indices appear to have staged a strong recovery this quarter. Unfortunately this is solely due to the contractual difference between monthly/quarterly petrochemical prices and naphtha priced on a daily basis.
Regional Petrochemical Industry Cash Margin Indices
Nexant’s “Quarterly Business Analysis reports” review regional trends in production economics for commodity petrochemicals and polymers in Western Europe, United States and Asia Pacific. The reports are published as part of ChemSystems / Petroleum and Petrochemical Economics Programme (PPE). Subscriptions to the programme are available from www.chemsystems.com . For further details please contact chemsystems@nexant.com.
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©2008 Nexant, Inc.
