Short supply means high demand, right? Not always

Why the supply chain needs to sometimes look beyond simple supply-demand models to understand chemical markets

Understanding why a particular chemical market is behaving in a certain way sometimes requires some sleuthing.

For example, when you see headlines such as this on ICIS News, one naturally thinks they have found a market experiencing high demand amid the ongoing coronavirus pandemic.

Short supply means high demand, right? Many times, yes.

Sometimes, though, you need to channel your inner Sherlock Holmes to discern why chemical markets are behaving in ways that on the surface seem odd. Let’s don our deerstalkers and figure out what exactly is going on with the acetone market.

While there are a few different routes to making the solvent, almost 97% of the world’s acetone is derived from upstream cumene, according to the ICIS Supply & Demand Database. That matters because the cumene process is dominated by phenol, with 1 tonne of phenol produced for each 0.60-0.62 tonnes of acetone. You’re not getting one without the other, and rarely does demand for both rise in tandem, so phenol and acetone are pendulum markets.

That pendulum tends to be weighted more towards the phenol market’s preferences than acetone, and understandably so, since much more phenol is output in the cumene process than acetone. Just a couple of years ago, phenol derivative demand from sectors such as automotive, medical and oil and gas pushed pricing and production higher and led to a huge oversupply in acetone amid muted demand for it as a solvent and in the manufacture of chemicals for the coatings, plastics, construction and automotive industries.

With global economies struggling to deal with the effects of the coronavirus pandemic, phenol demand has fallen dramatically and has taken production rates along with it. But that has led to tight supply for co-product acetone, which is still seeing good pandemic-related demand from the downstream isopropanol (IPA) sector for sanitization chemicals and from polymethyl methacrylate (PMMA) and polycarbonate (PC) production of shields and barriers. Still, those demand pulls do not make up for slack overall manufacturing demand, and thus there is no broad incentive for producers of acetone to create a larger oversupply of co-product phenol. Hence, you end up with supply tightness that is likely to persist until phenol demand improves. You also end up with a price chart like the one shown here.

In the chemical supply chain, tight supply of a product may not simply be a factor of increased demand but one of lower demand and production in a correlated market. That’s where chemical flowcharts such as the one provided by ICIS can be enlightening, and where the data and insights produced by ICIS lead to better understanding.

Markets may not be as elementary as Holmes might think, but where markets turn to for trusted intelligence should be.