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Chemicals industry likely to face longer-than-expected downturn, says ICIS

7th April 2020

By: Donna Slater

Features Deputy Editor and Chief Photographer

     

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The Independent Commodity Intelligence Service (ICIS) has warned the international chemical sector to prepare for an extended downturn along with lower-for-longer oil prices, both of which will have big implications for profitability and investments.

ICIS demand forecasting lead analyst Rhian O’Connor says that demand for this year, and possibly going into 2021, will not return to pre-coronavirus-crisis levels. “We are going to see a more extended downturn than we were expecting, and then a slower recovery than many are forecasting.”

She adds that crude oil prices will also likely be lower for longer, even if there is a deal between members of the Organisation of the Petroleum Exporting Countries (Opec) and Russia, or if Saudi Arabia agrees to curtail production.

For petrochemicals, the spread over oil prices should also be squeezed in a global recession with lower volumes.

There have also been significant decreases for European ethylene, propylene and benzene contract prices.

ICIS market reporting head Barbara Ortner points out that for European benzene, the April contract plunged 70% from March, settling at a record low of €171/t. Ethylene contracts for April fell by a record €200/t, to €720/t; while propylene dropped by €175/t, to €650/t.

However, even as the Chinese market rebounds, with its manufacturing economy getting back on track and local demand improving, the country will encounter “extremely difficult export conditions”, says ICIS chemical business global editor Joseph Chang.

According to SunTrust Robinson Humphrey US chemicals equity analyst Jim Sheehan, chemical company management teams are seeing a re-acceleration of demand in China, with all its facilities getting back to normal.

“Companies with exposure to automotive and industrial customers are starting to run at full employment capacity but not necessarily at full operating rates. These facilities are just running to meet demand.”

He adds that while demand rebounding in China “may sound like a positive thing”, the outlook for the second quarter of the year is a major economic contraction, with China exporting into markets that are not healthy.

“So it remains to be seen what level of activity we normalise at in China.”

OIL FORECASTS SLASHED

Meanwhile, analysts are reducing crude oil price forecasts for this year and beyond.

A large implication is the coronavirus containment factors cutting into international oil demand, with the balance increasing on the supply side owing to scepticism of Opec.

Citi global commodities head Ed Morse notes that Brent is averaging $30/bl this year and $17/bl in the second quarter.

In his base-case scenario, Morse sees Brent recovering to about $42/bl by the fourth quarter of 2021, which is however, far below the $60/bl-plus level before the crude oil crash in late February to March.

“The rapid shuttering of business activity in Europe and North America, even as China is recovering, should lead to a hit to demand on the order of 16-million barrels a day or more in the second quarter and an overall decline of 8.7-million barrels a day in 2020 in Citi’s base case,” he says.

In his bear case, crude oil demand falls by about 20-million barrels a day in the second quarter, and 10.6-million barrels a day for all of 2020.

Meanwhile, lower crude oil prices have had a dramatic effect on the US’s petrochemical cost advantage.

“The ethane advantage US producers had is gone. Lower oil means lower naphtha and lower European production costs, so the once advantaged US is not advantaged anymore,” notes O’Connor.

As for equity prices, Chang says sectors with greater consumer staples exposure are outperforming.

“Packaging stocks have held up much better than chemicals stocks,” he says, adding that chemicals feed into a wider range of applications, including automotive, construction and consumer durables, which have been “hardest hit”.

Sheehan also notes that US chemical stocks have “taken a beating”, more than discounting the negative market fundamentals. He explains that there is still a lot of uncertainty about the depth and severity of the recession and the duration of it. “But from what we know and can glean from talking to management teams, I would say the fundamentals are definitely discounted in the stocks.”

Sheehan points out that the problem is that the volatility in the equity markets is so severe that the stocks are not trading on the fundamentals right now. Instead, he notes that stocks are trading on a variety of things, including emotion and fear, and there is a lot of “forced selling going on.”

“Liquidity and balance sheet concerns are also driving equity prices, and companies will seek to mitigate the impact by cutting back on capex and share buybacks. Most companies in our space can manage through the crisis but that said, we just don’t know how long the crisis is going to last,” concludes Sheehan.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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