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9 November 2008
Trends for Chems
Financial Crisis Disrupts
Petchem Market
David Begleiter, CFA
Research Analyst
(+1) 212 250-5473
david.begleiter@db.com
James Sheehan
Research Associate
(+1) 212 250-6048
james.sheehan@db.com
Jason Miner
Research Associate
(+1) 212 250-8619
jason.miner@db.com
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from
local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to
request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Channel Check
Price and Margin Trends
HDPE prices, cents/lb.
55
60
65
70
75
80
85
90
95
100
105
110
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
LLDPE prices, cents/lb.
55
60
65
70
75
80
85
90
95
100
105
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Ethylene contract prices, cents/lb.
35
40
45
50
55
60
65
70
75
80
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
HDPE margins, cents/lb.
0
3
6
9
12
15
18
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
LLDPE margins, cents/lb.
-3
0
3
6
9
12
15
18
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Ethylene contract margins, cents/lb.
0
5
10
15
20
25
30
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Prices and Outlook
Product Price Outlook
Acetic acid $0.570 Flat/down
Ethylene $0.510 Down
Propylene $0.585 Down
LLDPE $0.800 Down
HDPE $0.850 Down
Polypropylene $0.870 Down
PVC $0.740 Down
PET $0.775 Down
Global Markets Research Company
Financial crisis spreads into real economy; stay cautious on ethylene chain
The financial crisis (which has exacerbated auto and housing sector weakness),
the monumental collapse of feedstock costs, and the sudden dissipation of export
demand have triggered dramatic October price declines throughout the
petrochemical industry. With US Q4 GDP forecasted to decline 4.5%, a stronger
dollar eroding the competitiveness of exports, and collapsing oil prices threatening
the cost advantage of natural gas-based ethylene production in the US, Q4 could
be the worst quarter for commodity chemical producers in nearly a decade.
October ethylene contract prices poised to drop 12 cents/lb
Contract ethylene prices are poised to decline 12 cents/lb in Oct. to 51 cents/lb
(following a 3.5 cents/lb decline in Sept.). Demand for petrochemicals and plastics
hit the wall last month, reflecting the freezing of credit markets, the global
economic slowdown, the freefall in feedstock prices, ongoing weakness in
housing and auto sectors, and the evaporation of export demand. Spot ethylene
prices fell 19 cents/lb to 38 cents/lb in Oct. and have continued to decline to 20
cents/lb in early Nov. (and below cash costs of mid-to-upper 20 cents/lb). With
demand weakening, GDP contracting, spot prices well below contract (and cash
costs) we expect ethylene contract prices to fall at least 6.5 cents/lb in Nov.
Robust-looking October ethylene margins out of synch with fundamentals
With average ethylene production costs sliding 25 cents/lb, outpacing the
expected drop in prices, October average ethylene margins climbed to over 20
cents/lb (vs. 11 cents/lb in September). Spot ethylene margins also rose 9
cents/lb to 15 cents/lb, the highest since September ’06, albeit on minimal
volumes. We expect ethylene margins to soon reflect the new reality of struggling
demand, derivative import competition, and increasing Middle East capacity.
October polyethylene prices likely down 11 cents/lb
October polyethylene (PE) prices remain unsettled, but will likely decline 11
cents/lb after falling 7 cents/lb in September. Domestic resin demand plummeted
as consumers anticipated lower prices in Nov., and export demand dissipated due
to the global economic slowdown. PE margins remain elevated as price declines
trailed input costs, expanding 6 cents/lb to 17 cents/lb in October despite
extraordinarily weak fundamentals. With domestic end markets ailing and export
demand fading, we expect Nov. PE contract prices to drop by at least 12 cents/lb.
Propylene prices collapse – down 30 cents/lb in November
Propylene prices have collapsed. Chemical grade propylene prices dropped a
record 30 cents/lb in November to 28.5 cents/lb following a 5 cents/lb drop in
October and a 20 cents/lb decline in September. Propylene prices were a record
83.5 cents/lb in August. Prices reflect lower oil prices, weak global demand, low
derivative operating rates, the recession in the US and Western Europe and the
expected startup of a large amount of new propylene capacity in the Middle East
Ethylene and polyethylene demand weakens globally
October ethylene contract prices decline 12-plus cents/lb. Though still unsettled,
contract ethylene prices are poised to decline 12 cents/lb in October to 51 cents/lb (following
a 3.5 cents/lb decline in September. While roughly half of the non-integrated merchant
market is holding out for steeper declines (in line with the drastic decline in feedstock costs),
producers are keen on holding on to margins given recent feedstock price volatility. In
October, demand for petrochemicals and plastics hit a wall, reflecting the freezing up of
credit markets, the global economic slowdown, and the free fall in feedstock prices (oil and
gas). These factors, coupled with ongoing weakness in the North American construction and
automotive sectors, caused industry demand to fall by 10-20%. The worsening problems in
the domestic market were exposed after operating rates returned to normal following last
month’s hurricanes. The brief market tightness caused by hurricanes Ike and Gustav likely
masked the deterioration in demand that was getting under way in September. Another key
factor in the October price movement was the virtual evaporation of export demand, as North
American derivatives are no longer priced competitively versus other regions of the world.
Among the major ethylene derivatives, ethylene glycol/ethylene oxide consumption declined
significantly for the second straight month on weak fibers demand. Vinyls demand has
plummeted to due the global economic slowdown and continued housing weakness in the
US. Styrenics demand has similarly dried up, with many buyers pushing orders into
November and de-stocking inventories in anticipation of the largest monthly price decline
ever. A stronger US dollar has become a headwind to ethylene derivative export sales, which
supported the supply/demand balance in North America for most of 2008. Data for August
(the latest month available) indicates that US net ethylene exports increased to 407MM
pounds, up 5% from July and up 21% YoY. Higher alpha olefins, vinyls, and styrenics
exports offset weaker polyethylene exports. However, with the dollar continuing to
strengthen, the decline in oil-based raw materials prices eroding North America’s cost
advantage, and an overseas demand shock emanating from the global financial crisis, the
export pricing window appears to have closed. CMAI estimates that September polyethylene
exports declined to ~570MM lbs, versus a YTD monthly average of 850MM lbs. Most
shipment went to Latin America as demand in China and Europe was virtually non-existent.
Spot ethylene prices plunge on unprecedented oversupply. Due to unprecedented
oversupply in October, spot ethylene prices fell 19 cents/lb to 38 cents/lb. Spot prices rose
1.5 cents/lb the previous month due to the hurricane disruptions. October witnessed
significant volatility as spot prices plunged over 15 cents/lb to the mid 20s by the end of the
month. The swing in spot prices, the largest percentage decline ever, was attributable to
collapsing demand and the freefall in feedstock costs. Reflecting recent volatility in energy
prices, October marked the seventh straight month that spot ethylene prices moved by 10
cents/lb or more. Spot ethylene prices ranged from 26.5-31.0 cents/lb in the second half of
the month. The delta between spot and contract ethylene prices widened to as much as
24.5 cents/lb, up from 8.5 cents/lb in September. The gap averaged 6 cents/lb in 2007. In
early November, spot ethylene prices fell to 20 cents/lb (and below cash costs of mid-toupper
20 cents/lb).
October polyethylene contract prices not settled. October polyethylene prices declined
by 11 cents/lb after falling 7 cents/lb in September. A few large buyers received additional
reductions of 2-5 cents/lb, as resin buyers resisted non-essential purchases in anticipation of
lower prices becoming available in November. CMAI estimates that resin demand in
September was already 11% below the YTD average, with HDPE domestic sales now off
8.8% year-to-date. October exports are estimated to have fallen by an even greater amount
(10%-plus). Overseas demand is particularly weak in China due to price disparities which
developed as a consequence of hurricane-induced supply tightness in the US during
September. The supply disruptions served to limit HDPE contract price declines to 7 cents/lb
in September, but also prevented a major inventory build. Based on demand, capacity
utilization in September was 83% for all PE grades combined.
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