By John Hall
Petrochemical prices are expected to rise slowly after the first quarter following a typical year-end slowdown that saw a slight dip in 2011.
Average manufacturing product prices for ethylene, benzene and other petrochemicals ended at $241.27, up 31.8% from the same period a year before, according to the producer price index (PPI), and are expected to dip slightly to $235.39 the first quarter of 2012, according to alertdata.com.
Now may be the best opportunity to buy in a market that has seen prices rising at a rate of nearly 30% year-to-year since 2008. “For purchasing managers, first-quarter 2012 is the best time to buy,” says Chuck Carr, Houston-based research analyst at IHS Chemical. “Second quarter there’s going to be a lot of turnaround activity and a lot of capacity will be offline for maintenance. Manufacturers will be burning through those inventories, which will cause prices to move higher.”
Current Market Conditions
According to alertdata.com, across all categories, the petrochemical PPI has traditionally started off low and peaked in May, leveling off by year end. In 2011, average product prices started at $217 first quarter and ended at $241, up 31.8% from the same period a year before. Raw materials costs, which are up 16.9% from a year ago, are the primary inflation driver.
“Suppliers have struggled hardest with purchases of petrochemicals, paying out an increase of 20%,” the company notes in its December 20, 2011 Blueprints bulletin. “Understanding how materials inflation fits in the overall budget/margin scheme is important for buyers and suppliers to fairly manage any proposed price change.”
To better understand current market conditions, consider what happened at the end of 2007, when the $3-trillion-plus global petrochemicals marketplace witnessed its largest ever price increase. The Platts Global Petrochemical Index (PGPI), a proprietary measure of comparison for determining the profitability of selling a barrel of crude oil intact or refining it into products, “jumped from $1,258 per metric ton to as high as $1,679 in mid-July,” says Jim Foster, senior petrochemicals editor at Platts, a global provider of energy, metals and petrochemicals information. “The 33% increase ended, though, following the economic crisis of that year.”
“We went from record high prices for everything imaginable made from petrochemicals to rock bottom prices,” Carr at IHS Chemical adds. “Demand was terrible. Manufacturing slowed considerably.”
Excluding a series of mid-year corrections, petrochemical prices have stayed strong since then, Foster at Platts notes. For his part, Carr attributes a great deal of the pricing trend to surging demand from Asia, particularly China, which seized the opportunity to buy low in 2009 and fill its inventories. Concurrently came a wave of petrochemical plant building in the Middle East and Asia, fueled largely by demand for commodity-based resins such as ethylene, propylene and ethylene glycol, he adds.
By 2010, global petrochemical inventories were bloated and manufacturer’s gross margins (which have hovered in the 39% range) began to get squeezed, Carr says.
“On the demand side, 2011 was a tale of two halves,” he says. “The first half saw strong demand globally. But consumer confidence waned and the European debt crisis hit, which put a lot of pressure on prices and margins.”
Carr expects 2012 to be a reverse of the year before.
“For manufacturers, the first half will be relatively weak yet improving but the second half of 2012 should be better,” he says, predicting demand to ramp up by mid-year. “In 2011, China eased up on imports, and in 2012 we’ll probably see them loosen things back up.”
Foster is a bit more optimistic about pricing in the first few months of 2012. “Petrochemical prices globally started 2012 stronger as seasonal restocking gave a boost to demand,” he says, noting that Platt’s PGPI shows petrochemical prices traditionally strengthening during the first quarter following a pre-holiday de-stocking lull. “Just a few weeks into 2012 and petrochemical prices are already surging since bottoming out at the end of November,” he says.
Alertdata.com is predicting average petrochemical product prices will dip slightly from the final quarter of 2011 to $235 in the first quarter, yet finish year-end at $247.
In spite of ubiquitous oil supply worries, alertdata.com is projecting a calm year in terms of supply. “The estimated rate of growth in industry output is near normal and unlikely to cause order fulfillment and distribution delays,” the firm notes in its report. “Upstream utilization rates indicate suppliers should have normal access to required raw materials.”
Global recession fears are easing and barring any catastrophic outcomes of the European debt crisis, Carr sees lending easing up mid-year, stimulating investment and buying in the second half.
Petrochemical markets tend to correct themselves mid-year, and 2012 will be no different, according to Foster. “A drop-off in prices in the late summer could be attributed to something as simple as a mild hurricane season, following a spring run-up in prices as market players built inventories ahead of any potential storms,” he says. “Or, like in 2011, economic news like the U.S. credit rating downgrade can rattle the markets. There are also the lingering threats from Iran that have recently created uncertainty in the crude markets.”
Two developments to consider in the years to come include bio-based chemicals and the remarkable proliferation of shale gas drilling, particularly in North America.
Renewable, bio-based feedstocks from agricultural sources such as sugarcane and corn are emerging as viable alternatives to fossil fuels, according to a recent IHS report, noting such recent “high-profile packaging innovations as Coca-Cola’s PlantBottle™, which is made from bio-based polyethylene or partially bio-based polyethylene terephthalate (PET).”
“The big stuff coming in the 2015-2020 time period are massive investments to consume the products coming from shale gas and oil,” Carr says.
“It’s unique right now to the North American continent because we have all of the existing infrastructure from natural gas and oil production. Where those were once shrinking industries, they are now vibrant and growing. We’re getting ready to see a huge wave of petrochemical investment in the North American market for materials that go into making ethylene and propylene and the feedstocks that go into petrochemicals.”
John Hall is a freelance writer who reports on commodities markets and procurement and supply management topics for My Purchasing Center. His website is jhallmedia.com.
George E. Krauter
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