US petrochemical producers face a perfect storm

The US petrochemical and polymers sector is witnessing almost a perfect storm so far in the new year. In the US, ethane and propane feedstock prices are sliding along with natural gas prices, while global crude oil prices continue to maintain high levels of over $100/bbl.

That means US producers are benefiting on both the cost and pricing ends, notes Charles Nievert, analyst at US-based investment bank Dalhman Rose & Co.

"This is a near ideal situation for US producers, global prices being forced up by oil and local costs declining with lower raw material price. The margin grows from both sides," says Nievert. The situation has rapidly widened US ethylene margins, he adds.

Ethylene and overall chemical prices tend to follow crude oil rather than natural gas prices.

Ethane's price decline of 16 cents/gal since the start of the year is worth about 6 cents/lb in margin for ethylene. At the same time, spot ethylene prices are up about 5 cents/lb since the end of 2011, notes the analyst.

It's a very different picture in Europe, where chemical producers face a tough first half, according to global investment bank HSBC.

"The sharp drop in chemical prices and lead indicators across the world, as well as our economists' view that Europe will be in a recession in 2012, do not bode well for the sector's prospects for the next couple of months," say HSBC analysts.

"On top of that, the sector is up against tough comparables, as the first half of 2011 was one of the best periods the sector has ever experienced," they add.

But the US and the rest of the world is far from insulated against a European recession. A recession in the eurozone will cut into chemical demand, as well as put downward pressure on global pricing.