Asian markets panic as polyethylene glut begins to develop

GU 6Dec14The word “panic” crept in to ICIS chemical market news reports this week, as its pricing specialists surveyed the Asian market.  Polyethylene (PE) was particularly highlighted, with headlines such as:

At the same time, ICIS was reporting that:

“Middle East suppliers may be holding on to at least two to three months’ worth of PE stocks due to subdued buying globally.  Distributors and traders in the Middle East are also said to be keeping high volumes due to weak demand and may look to sell PE at lower levels to entice buying interest”

News reports for other products such as polypropylene (PP) also featured the word, as in: “Indian PP producers slash offers as panic sets in“.  It even crept into a styrene market report, “The panic-selling seen yesterday has abated and sellers are mostly in a wait-and-see mode”.

The reason is in the chart above, showing benchmark portfolio price moves since the Great Unwinding of policymaker stimulus began in mid-August. The scale of the collapse is starting to mirror that seen in H2 2008:

  • Benzene, always my own favourite indicator is down 40% in less than 4 months (green line)
  • Brent oil (blue) and naphtha (black) are both down more than 35%
  • PTA in China is down nearly 30% (red), whilst US PE export prices are also now tumbling (orange)
  • The yen is down nearly 20%, as investors start to panic about the impact of Abenomics (brown)
  • Only financial markets remain positive, with the S&P 500 hitting new record highs (purple dash)

Chemical markets are thus playing their usual role as leading indicators for the global economy, recognising that:

  • Oil prices are probably only half-way through their return to being based on supply/demand fundamentals
  • China’s demand is weakening, with the key markets of autos and housing clearly in trouble

The oil price decline also has major implications for US GDP growth.   As research from the Manhattan Institute warned last month:

Without the $300 to $400bn yearly increase in output from oil and gas production, economic growth would still be negative as lower oil prices are now a net negative.  The New Normal is that the hit to domestic energy producers is greater than the benefit of lower prices to energy consumers.”

Shale gas/oil investment has also been key to the recent recovery in the jobs market.

The key question now, as Asian markets are recognising, is whether there really is a market for all the new US production, given the global energy glut?

Players in the region know that China’s demand growth is stalling, as the government bursts the lending bubble.  And yet at the same time, China’s major expansions in petrochemical and coal-based production are coming online

This all seems a very difficult background against which to try and sell a 50% increase in US ethylene capacity.


The weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:

Benzene Europe, down 40%. “Sharp losses for crude and weaker global pricing weighing down on sentiment”
Naphtha Europe, down 37%. “Ongoing bearishness among market players as a result of persistent oversupply.”
Brent crude oil, down 36%
PTA China, down 29%. ”Prices went lower despite lower operating rates at PTA facilities in the key China markets.”
¥:$, down 19%
HDPE US export, down 8%. “Prices fell across the board, as US producers tried to get competitive with foreign prices, which also fell”
S&P 500 stock market index, up 6%

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