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A prospect for Q4 through uncharted waters of 2020 amid pandemic

by Esra Ersöz - eersoz@chemorbis.com
  • 10/09/2020 (10:13)
2020 so far has been indisputably shocking and challenging in the thick of a pandemic. Few analysts would predict record contractions in major economies and notable jumps in unemployment rates. Would anyone imagine crude oil being sold at $40 per barrel but in negative territory?

These unprecedented developments, needless to say, also found reflection on petrochemicals, where polymer prices retreated to their more-than-10-year lows in the aftermath of the coronavirus outbreak. However, it did not take too long for prices to pare their losses and return to pre-pandemic levels.

“ The volatile market was no surprise to petrochemical players in the past 6 months, therefore. However, what if we say the volatility was not as dramatic as in the past years despite the height of the devastating virus crisis? ”

Even though polymer prices mostly neared and even reached all-time lows in Q2, according to ChemOrbis data, the volatility was far from that of 2008. Rather, the scale of the volatility was fairly lower.

Indeed, when historical data is analyzed, there were times prices witnessed a higher volatility of up to $400/ton, evidently not driven by an economic crisis (as in 2008) but by internal dynamics in several major domestic markets.

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2020 has witnessed a relatively lower volatility in prices because polymer prices were already on a falling trend since the second half of 2018, disregarding the small upswings within this time. That is to say, unlike 2008 the downtrend did not kick off from all-time highs, and prices have already been trading at low levels.

This is one of the main reasons why price declines are occuring only in small amounts during Q3 in certain markets across the globe while some are even witnessing a firmer trend albeit cautiously and modestly.

HERE IS WHAT TO WATCH OUT FOR Q4 2020!

1. Oil: Past its peak

The first parameter to watch for petrochemicals is, needless to say, the oil markets, where demand remains subdued due to lower consumption across the globe and plunging oil prices. Some refineries were forced to shut down in the US and also in Asia while nearly 10% of high-cost refineries in Europe are also facing a serious threat of closure.

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The first two quarters of the year was traumatic enough as WTI and Brent benchmarks started the year around the $60/bbl threshold before WTI oil fell into the negative territory by the end of April. It took two months for oil prices to climb back above $40/bbl. Throughout July and August, two major oil benchmarks, WTI and Brent, have been hovering around $40-45/bbl.

“ Whether oil prices will move back up to $60/bbl, where they started the year 2020, is not considered likely for the rest of this year given the fact that demand outlook remains murky. ”

Demand for oil mainly comes from gasoline and jet fuel. At a time crude consumption has already been facing a slowdown threat from the transition to electric vehicles, analysts say oil demand will be much lower than usual for the rest of the year owing to the ongoing pandemic concerns. Several industries including travel, leisure, retail, commercial and residential property have already taken a knock from the coronavirus crisis, facing bankruptcies.

The second main address to oil demand is the petrochemical industry. Even before the pandemic, petrochemicals were seen as a ‘life-saver’ by refineries as a result of the changing consumption patterns of oil.

Nevertheless, the oil industry’s inevitable reliance on petrochemicals is brittle in the wake of the widespread campaigns and persistent efforts to cut the use of plastics in developed countries. Thus, the growth the petrochemicals industry is promising may not be enough to shoulder the growth of the oil industry on its own and help prices climb back above $60/bbl.

What is more, alternative feedstocks have been developed in chemical and petrochemical industries, which partly reduces the appetite for crude oil.

The hurricane season also caused several major shutdowns at oil production in the US at the end of August. Yet, this resulted in only marginal gains in pricing. More fundamental changes are needed for the oil industry, other than simply cutting supply.

2. Polymer demand: Good, bad or worse?

Demand is hard to measure and predict. Import & Export statistics, which are closely watched as a bellwether for the size of demand in polymer trade across the world, tell us interesting things.

“ Positive results ensue for H1 statistics in several major markets regarding the size of polymer demand. This is despite the unprecedented challenges caused by the pandemic. ”

ChemOrbis Stats Wizard suggests that the United States exported a record amount of polymers in H1, almost catching the previous year’s full exports.

The European Union’s exports also only slightly increased but hit a record high in the first half of the year while its imports remained marginally stable for the same time period.

Additionally, South Korea’s overall polymer exports rose marginally in H1, which was surprisingly achieved in Q2 and hit a record high for South Korea’s quarterly exports.

More importantly, overall polymer imports of China and Turkey, two import-dependent markets to a large extent, reached all-time highs in the same time frame, according to ChemOrbis Stats Wizard. This was due to the fact that players must have stocked up when prices reached their more than 10-year lows both in Asia, Europe, Middle East and Africa.

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“ Not everybody wins; India suffered the most.”

Nevertheless, not all countries, regions and blocs improved their polymer trade during the pandemic.

India was hammered the most in H1, statistics reveal. There was a conspicuous slump of 80% in overall polymer imports both on a quarterly and yearly basis. India is also an exporter, where a 50-60% decrease was witnessed.

The ASEAN bloc suffered from the pandemic, as well, with a 42% decline in overall polymer imports in Q2 on a quarterly basis. Indonesia’s imports fell by one third both on a quarterly and yearly basis while Malaysia, who doubled its exports in Q1 and achieved a record following the full start-up of the RAPID project, experienced a 60% drop in Q2.

Taiwan, meanwhile, one of the major petrochemicals exporters, encountered a 24% decrease in the first half of the year, a large portion of which unsurprisingly occurred in the second quarter.

“ Deteriorating economics remain a major concern in the wake of the persisting pandemic.”

Apart from statistics, economic indicators are crucial to gauge demand. It was no surprise to see economies suffer huge losses in the first half of this year.



The global economic outlook still indicates contraction for 2020. Although the construction industry rebounded in the third quarter in line with government incentives to boost economies, which spurred demand for Polyvinyl chloride (PVC) and High-density polyethylene (HDPE) pipe, other major industries including automotive, textile and travel remain damaged.

It is not only the negative growth but also devaluating local currencies and political tensions are weighing down on purchasing power. The long-lingering discussions between China and the US following the trade war started by the Trump administration in 2018 are likely to drag on further in the wake of the upcoming elections in the US. In the meantime, China continues to develop its own business network cooperation with China Road Belt Initiative (RBI).

“ In a nutshell, although there may be a slowdown in polymer demand in H2 under the shadow of poor economics, contractions are not assumed to occur widely for the full year despite the pandemic, based on H1 statistics. ”

Taking it one step ahead, one may claim overall polymer consumption may even inch up for China, the EU and Turkey at the end of the year in tandem with an improved purchasing power as restrictions have eased in H2 and players may need to compensate for tighter availability.

3. Polymer supply: Tightness vs oversupply?

Demand is hard to measure and predict. Import & Export statistics, which are closely watched as a bellwether for the size of demand in polymer trade across the world, tell us interesting things.

It was around the end of the first half and the beginning of the second half of 2020 when suppliers largely cut their operating rates or underwent maintenance shutdowns in an attempt to counterbalance supply with slower demand. This largely helped polymer prices pare their earlier losses and even move above the pre-pandemic levels for most products in many regions.

This tightness in supply may persist for late Q3 and early Q4 particularly for Polyvinyl chloride (PVC) and Polyethylene (PE). Nonetheless, we should keep in mind that PE markets, the largest-used product among polymers, have been undergoing an overcapacity issue following the start-up of the new capacities in the US and Asia. Plus, there is more to come.

Polyethylene terephthalate (PET) is no different in terms of new capacity additions vs. demand growth, while Polypropylene (PP) is relatively balanced but remains under the shadow of PE.

“ Once tightness concerns ease and year-end destocking activities kick off, oversupply concerns are highly likely to re-emerge in the latter part of Q4, weighing down on pricing.”

There comes the time to ask those big questions: How will the polymer markets evolve and where will prices go from here? To tell you the truth, these are a million dollar questions. In such a compelling situation, few would give you the exact answer.

WHERE WILL PRICES GO NEXT? IS THERE MORE VOLATILITY AHEAD?

However, it is possible to argue that prices will fluctuate in a relatively narrower spread. Here is a list of why:

Prices are already low. This is what historical price data confirm. The bottom levels prices may see were already witnessed back in April and May. The cost side may not allow much lower levels than those, unless there are other major complications.

On the high side, prices may not have room to spike considerably. This is because the pressure from unsatisfactory demand and ample supply will be more evident than before to make the price in the last quarter. These supply-demand dynamics may eventually dent the sentiment and not allow bullishness to prevail for a long time.

Affirming this assumption, ChemOrbis Price Index suggests that the rebound from the bottom in 2008 in the following 5 months was sharper than the rebound witnessed this year for many regions and products. That is to say, the pressure from supply-demand dynamics is more obvious today.
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