10 February 2009
Trends for Chems
De-Stocking Ends in January
David Begleiter, CFA
Research Analyst
(+1) 212 250-5473
david.begleiter@db.com
James Sheehan
Research Associate
(+1) 212 250-6048
james.sheehan@db.com
Jason Miner, CFA
Research Associate
(+1) 212 250-8619
jason.miner@db.com
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Periodical
Price and Margin Trends
HDPE prices, cents/lb.
55
60
65
70
75
80
85
90
95
100
105
110
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
LLDPE prices, cents/lb.
45
50
55
60
65
70
75
80
85
90
95
100
105
Feb-08
Mar-08
Apr-08
May-
08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Ethylene contract prices, cents/lb.
25
30
35
40
45
50
55
60
65
70
75
80
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
HDPE margins, cents/lb.
0
3
6
9
12
15
18
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
LLDPE margins, cents/lb.
-3
0
3
6
9
12
15
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Ethylene contract margins, cents/lb.
0
5
10
15
20
25
30
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Prices and Outlook
Product Price Outlook
Acetic acid $0.560 Down
Ethylene $0.315 Flat/up
Propylene $0.205 Up
LLDPE $0.570 Flat
HDPE $0.550 Flat
Polypropylene $0.420 Flat
PVC $0.590 Up
PET $0.580 Up
Global Markets Research Company
End to de-stocking does not erase pressures on ethylene chain
While derivative consumers have started to rebuild inventories after a period of
aggressive de-stocking, underlying petrochemical demand remains poor. Pricing
improvement in January reflects the dramatic capacity reductions of the past two
months, with 21% of North American ethylene capacity offline. The re-start of up
to 7 ethylene crackers this month is likely to limit the upside to pricing and
margins. With US GDP contracting 6.5%(E) in Q1 and FX headwinds clouding the
export picture, we remain cautious on the ethylene chain.
January ethylene contract prices rise 3 cents/lb
Contract ethylene prices rose 3c/lb to 31.5 cents/lb in January (following a 9.5c/lb
decline in Dec.), reflecting higher feedstock costs and tight supplies, which are
now better aligned with poor downstream demand. There was also modest
inventory re-stocking activity. Spot ethylene prices rose 5c/lb to 23c/lb, following a
3 cent drop the previous month. Due to continued macro pressures, and the 8
cents/lb premium of contract over spot ethylene prices, we expect ethylene
contract prices to roll over flat in February.
Ethylene margins improve to -2 cents/lb in January
Ethylene production costs increased nearly 2c/lb in January to 28c/lb (down 45%
YoY). With the rise in contract prices in January, average ethylene margins (based
on combined contract/spot) improved to -2 cents/lb from -4 cents/lb in Dec.
Contract ethylene margins continue to hover slightly above breakeven, improving
by 1 cent/lb to 2 cents/lb. Spot ethylene margins (a proxy for the health of the
ethylene chain) improved by 4 cents/lb but are still unrewarding at -6 cents/lb.
With pricing likely to remain flat and feedstock costs likely to ease slightly, we
expect ethylene margins to stay slightly negative (-1 cents/lb) in February.
January polyethylene (PE) prices rise 7 cents/lb
Prices for most grades of PE increased 7c/lb (to 65 cents/lb for low density
[LDPE]) in January after falling 10 cents/lb in Dec. Prices for blow molding and
injection molding grades of high density polyethylene (HDPE) rolled over flat.
January price increases reflect pre-buying on the perception that prices and
feedstocks reached bottom in Dec., coupled with firmer resolve by producers to
improve their margins. LDPE margins rose 3 cents/lb to 14 cents/lb in Jan., while
margins on HDPE fell 5c/lb to 7c/lb. With downstream demand subdued,
feedstock costs not exerting pressure, and the recession weighing on end
markets, we do not expect a 5c/lb price increase to stick in February.
Propylene prices rise 2 cents/lb in January
Chemical grade propylene prices rose 2c/lb in January to 20.5 cents/lb. The price
increase reflects inventory re-stocking demand for propylene derivatives, the start
of FCC turnaround season, light cracker feedslates being advantaged, and reduced
production rates. These factors offset weak global demand, the recession, and the
anticipated startup of new propylene and derivative capacity in the Middle East
and Asia. We expect propylene prices to increase modestly in February, remaining
near fuel values and staying competitive with Asian prices.

Ethylene and polyethylene prices rise in January
January ethylene contract prices rise 3 cents/lb. Contract ethylene prices increased 3.0
cents/lb to 31.5 cents/lb in January (following a 9.5 cents/lb decline in December). The price
increase reflects a 2 cent/lb increase in production costs, coupled with much tighter supplies
and the need to provide incentive for additional supply given negative ethylene margins last
month. While some inventory re-stocking took place activity in January, downstream
demand remains poor following the weakest demand quarter since 1993. A 62% nameplate
operating rate in January, reflecting dramatic capacity reductions, has finally brought supply
into better alignment with demand. In Q4, contract prices declined by a total of 34.5
cents/lb, or 34% YoY, returning to 2003 levels.
Spot ethylene prices rise 5 cents/lb. January spot ethylene prices rose 5 cents/lb to 23
cents/lb, following a 3 cent drop in December. Spot ethylene prices ranged from 25.5-26.1
cents/lb in the second half of January. The delta between spot and contract ethylene prices
declined to 8 cents/lb from 11 cents/lb in December. This gap averaged 11 cents/lb in ‘08.
Derivative demand is weak. Among the major ethylene derivatives, ethylene glycol/ethylene
oxide consumption was slow in January, with PET bottle resin and antifreeze demand
remaining weak. Demand slowed further at the end of the month due to Chinese New Year
shutdowns. Vinyls demand remains extremely weak due to the global economic downturn
and worsening housing and auto trends in January. Due to PVC industry shutdowns, EDC
operating rates fell to a historic low of 56% in Q4. Styrenics demand is generally weak, and
export demand from Europe has stalled as capacity has come back on line.
Derivative export demand has stabilized at a lower level. Net ethylene export demand
began to weaken in September, and has stabilized at a lower level. Data for November (the
latest month available) indicates that US net ethylene exports decreased 29% (48% YoY)
from the previous month to 154 thousand metric tons. Vinyls and polyethylene exports led
the declines, while styrenics exports actually rose, and ethylene glycol remained in a net
import position.
Polyethylene contract prices rise 7 cents/lb (for most grades). Prices for most grades of
polyethylene increased 7 cents/lb (to 65 cents/lb for low density) in January after falling 10
cents/lb in December. Buyers of low density, linear low density, and high density (film)
grades of polyethylene saw the full 7 cents/lb increase, while prices for blow molding and
injection molding grades of high density polyethylene (HDPE) rolled over flat. Film grade
HDPE is in the tightest supply of all the grades currently, which explains why producers were
able to push through the price increase. Two major producers of blow molding and injection
molding HDPE delayed the 7 cent/lb price increase until February. The January price
increases did not reflect improved demand, but rather pre-buying on the perception that
prices and feedstocks had reached bottom in December. There was also a heightened
resolve by producers to improve their margins during a period of extraordinary financial
distress. With LyondellBasell filing for bankruptcy, Dow Chemical shaken by the collapse of
its transformational joint venture with Petrochemical Industries Co. of Kuwait, and other
producers experiencing financial challenges over the past 3 months, many producers were
willing to lose business rather than capitulate on price in January. Operating at 55% of
capacity, PE producers in North America manufactured less than 2B pounds of polyethylene
in December, the lowest non-hurricane impacted month since August 1995. PE inventories
plummeted in December from 53 days to 30 days (vs. an average of ~40 days from the first
11 months of 2008) due to the reduced production rates. For February, we expect the full 7
cents/lb price increase to be implemented for the remaining grades of HDPE. Producers
have nominated a price increase of 5 cents/lb for February and an additional 6 cents/lb for
March 1. At least one producer has also announced an additional 3 cents/lb price increase
for March on the grade in tightest supply, film grade HDPE.