Petrochemical downcycle is advancing

28-Jun-07

Unlike the refining cycle, whose downturn has been pushed away till mid 2010 or early 2011, the petrochemical cycle is headed for a downturn as early as 2009, as per a recent research. Macquarie Research, said there would be approximately 15 million tpa of global ethylene capacity additions by 2009. Out of these, almost 10 million tpa of ethylene capacity would be added in Middle East. This would lead to a huge surge in product supply, which would exceed demand. Prices of petrochemical products would fall sharply and the margins will start shrinking. Analysts said with new petrochemical capacity additions in the pipeline, there would be a huge surge in supply and this would squeeze the margins of petrochemical players. Though large integrated petrochemical players such as Reliance Industries Ltd (RIL) will not be affected much, smaller players which are usually standalone manufacturers of petrochemical products would face the heat as they would be at a greater risk of shrinking margins because each petrochemical product has a different cycle and hence, is priced differently in the market. Firms that are upstream in the petrochemicals sector, primarily refining and intermediates production, are in best fundamental position. Another analyst said the petrochemical sector was currently going strong and the prices were stable till new capacities are not added. With some capacity additions being delayed, especially in Iran, prices were likely to remain stable till 2008 end. Since naphtha prices are currently at a high because of the seasonality factor, manufacturers in order to maintain margins, are pricing their petrochemical products on the higher side. But as soon as tightness in refining eases, which is not seen soon, price of naphtha would also come down.