Recent petrochemical prices increases could be a "fool's rally," says one analyst who expects petrochemical and polyolefin prices to remain flat until about 2002, when economic recovery in Asia is expected to finally take hold and demand for petrochemicals and polymers is forecast to catch up with capacity.
Large amounts of capacity had been built in response to healthy profits in the mid-1990s. However, the forecasts that suggested these additions were a good idea were wrong, says Fred Peterson, president of Probe Economics Inc., a chemical industry planning, forecasting, and consulting firm based in Millwood, NY.
"Already, ethylene, propylene, and styrene margins have shot up, and polyolefin margins are approaching peak levels," Peterson says.
Five factors that have pushed up petrochemical and polymer prices earlier than expected. They include the doubling of oil prices; strong US and Asian economies; low plastics prices; delayed or canceled expansions of new processing plants and lack of financing to run existing plants, especially in Asia; and the probable accumulation of inventories downstream.
Peterson says each of these factors have tightened the market a little further. The cumulative effect has moved forward the point at which markets will peak by about a year, to around 2002, assuming that the economy stays healthy.
With that still more than a year off, Peterson says he questions whether markets will remain as tight as they are now. He believes the current peak in petrochemical margins is misleading because the time is not right for sustained market tightness.
He adds that the markets will soften before they get tight again, because some of the five factors will disappear. "Downstream inventories, which were accumulated in response to rising prices, will be depleted once it becomes apparent that pricing is peaked," Peterson says. This "destocking" will be even more dramatic if the economy slows down too much, which Peterson says he thinks could happen.
"The US economy is seriously overheated, and the Federal Reserve Board only has about a one-third chance of bringing it in for what is called a 'soft landing'," Peterson explained. "That means raising interests rates and slowing growth in such a way that no one in the plane gets knocked out of their seat or, more importantly, out of their jobs." More likely, an economic slump, or an outright recession, will result from the Fed's efforts. "Oil and chemical prices will then fall," Peterson says.