It is 5 months since the blog launched its IeC Downturn Alert, using prices from 29 April. It wrote then that:
“They don’t ring bells at market turning points. Otherwise, we could all retire to the Bahamas.”
But its argument was that a peak was likely, as crude oil had remained stable at $125/bbl for 4 weeks.
Buyers had previously bought forward as prices rose, to protect downstream margins. Now they would try to reduce this unwanted inventory. Equally, oil prices at April’s level had always led to recession in the past, and it was unlikely that ‘this time it may be different’.
Evidence that a Downturn is now underway is all around us:
• European cracker operators are mostly at 70-75% operating rates
• A major naphtha surplus has developed in India and the Middle East
• Crackers in Japan, Taiwan and parts of SEA are running at 80-90% rates, with S Korea set to join them
• The US Federal Reserve is forecasting GDP growth of just 1.6%, half its June estimate
Coincidentally, as the chart shows, financial markets such as the US S&P 500 Index also peaked on 29 April, although their decline has so far been less dramatic. The high frequency traders who dominate these markets, have no interest in the fundamentals of supply and demand.
Today, however, the only question is ‘how long will the downturn last, and how deep will it be?’ Mario Draghi, the new head of the European Central Bank, forecasts “a mild recession” in Europe. We can all share this hope, but hope is not a strategy. Sensible Boards will develop scenarios that also include a worst case of a sustained and deep recession.
The blog was in a small minority when it launched its Downturn Alert.
Having run major businesses in the past, it knows that buyers always give seemingly convincing reasons when cancelling or deferring orders. It therefore felt it might be helpful to present a global overview, covering benchmark products and regions, to highlight that the problems were general, and not specific.
The industry’s current laser-like focus on year-end inventories means that we should avoid the problems seen in Q4 2008, when inventories piled up around the world. Instead, lower operating rates will mean that buyers occasionally find themselves short of product, as has happened this week in China on polyethylene.
But these short-term issues should not be confused with the potential for a quick recovery.
The Downturn Alert has hopefully helped the industry to navigate the last few difficult months. It will now be renamed the IeC Downturn Monitor, to reflect its new role of charting the problems that lie ahead.
ICIS pricing comments this week, and price movements since the IeC Downturn Alert launched on 29 April, are below:
Benzene NWE (green), down 29%. “Demand remains subdued for the current month”.
HDPE USA export (purple), down 24%. “Prices were rising, as global buyers began to restock, including in China and S American markets.”
Naphtha Europe (brown dash), down 20%. “The market continues to suffer soft demand, and has lengthened from the previous week.”.
PTA China (red), down 18%. “Most players were worried that the downturn may extend into the rest of the year because of the poor demand for polyester in China, India and parts of SEA.”
Brent crude oil (blue dash), down 12%.
S&P 500 Index (pink dot), down 8%