Summary
Demand has recently been boosted artificially by incentives such as 'cash for clunkers'. 2008 ended dreadfully, companies are terrified of another crash in demand. Caution is justified.
Analysis
At face value, great news, but we have to ask the question -
‘How sustainable is demand for chemicals and plastics in Q4?’
Memories of 2008 are still vivid, when demand fell to near zero and prices plummeted accordingly. Inventories have in general adapted to lower levels of business. Companies are not going to be caught again. There was a big pull for chemicals and plastics in Q2 and Q3 as demand in the auto industry was boosted by ‘cash for clunkers’ in the US and similar programs in Europe. This was undoubtedly reflected in the recent strong earnings reported by Ford and some improvement in results at chemical majors such as BASF and Dow Chemical.
US companies also benefitted from arbitrage windows earlier in the year. The US suddenly had very competitive feedstocks and low gas prices. Middle East capacity has been delayed which also provided a boost to operating rates for commodities as exports increased. We will look carefully for any signals as November progresses. Perhaps China will pull the whole world into sustained growth, but it is too early to tell. Chemical companies are still making cautious comments about the outlook, and rightly so.
Ian Davenport consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
