The Year Without A Hurricane Season
Hurricane season is a factor that no markets can truly build into their models - and for those that try, the lack of storm activity can be as devastating as the storms themselves.
2009 was a mild year for the Gulf - and prices were correspondingly stable. For the polyethylene chain, this meant that spot prices were between 40 and 50 cents per pound - the lowest levels the industry has seen for more than two years.
The story of 2009 was that absent a natural disaster in the Gulf Coast, the resin markets spent the year climbing out from the depths they reached at the end of 2008.
Although it was more than a year ago, the quick climb of resin prices to nearly $1 per pound during the crude spike of June and July of 2008 still feels very recent — especially for those downstream contracts with time-delay pricing mechanisms built into them.
The resounding shrug during the volatile hurricane season of 2008, which saw one storm pound the Gulf Coast after another in September, showed suppliers the true wrath of disgruntled buyers. Buying nearly stopped, and not even a shutdown of most of the region’s production could stop prices from sliding.
Starting 2009 below 20 cents per pound, ethylene has had a tough year, barely breaking 30 cents per pound by mid-November. Fortunately for ethylene producers, ethane prices have been largely disconnected from crude oil’s swings and have remained a profitable raw material for much of the year.
Ethane prices have been between 30 and 40 cents per gallon, until very recently, rising to 60 cents per gallon during October. Even at these levels, ethylene margins have remained positive.
Without much steam behind demand, spot polyethylene prices have similarly clawed their way back from below 40 cents per pound to finally breaking above 50 cents in November.
Margins have been stable, but the demand hangover from 2008 lingers. And without a supply crunch, the pace of the 2009 markets has been relatively slow. Low prices, however, opened up export opportunities during some parts of the year, but the unpredictable nature of export demand has kept resin production rates basically matched to orders in the US.
For those who bet on a storm season to pop the doldrums of 2009, it was more than a disappointment. Buying into the 2009 market during the second or third quarters of 2008 created havoc for those expecting to easily liquidate their positions this year — those price levels were never reached. But at the time, when spot ethylene was trading at 60 cents per pound and rising, and spot polyethylene was difficult to source even at 85 cents per pound, it may have seemed prudent to buy some supply security at those levels. The markets have yet to reach them, however.
These situations serve as great lessons to those entering or considering risk management for chemicals. Buying and selling positions in markets stretching out over many months or years requires more than a belief in the direction of the market - other positions must be linked. For example, buying a Calendar 2010 strip of ethylene at 60 cents per pound may sound disastrous, but not if that buyer also locked in a sale of PE for the same time period at 80 cents per pound. It’s all relative in risk markets, and little of it has to do with what prices actually turn out to be when the position matures.
It is sometimes said that the price of a commodity is what someone will pay for it — in this sense, buyers were the stars of the 2009 physical markets show as they proved that axiom by their silence and reticence to build inventory at all this year.
In the larger picture, the markets have been at a loss to make confident predictions since the brutal hurricane season of 2005. After two years of calm, the storms of 2008 made confoundingly little impact on market prices. And in a year like 2009 - a year without a hurricane season - prognosticators have again thrown up their hands.
What we know is what has occurred — and the nature of risk is to bet on the future. The continued hesitance of the markets at large to take on risk after the crippling credit crisis seen in 2008 had already hobbled potential risk-takers. The inability to discern a measurable effect on the markets with or without a hurricane season also keeps potential market makers at bay.
As 2009 draws to a close, the expectations of most are more of the same: holding on to yesterday’s price and keeping margins intact.
_____________________________________
The PetroChem Wire is a daily newsletter serving the petrochemical industry. It counts every major chemical and refining company among its subscribers, as well as many major manufacturing concerns, global conglomerates, industry consultants, equity analysts and government agencies.
Contact:
Kathy Hall, Executive Editor
+1 720 480 6288
kathy@petrochemwire.com
www.petrochemwire.com
Copyright 2009