A very wise man once said that calculating future prices in the chemicals industry is 60% art and 60% science. Whilst this wise man clearly needed some help with his maths, he was right to say how difficult the process is.
To outsiders, trading industrial chemicals may seem like a straight forward business. But to those that know, it is an occupation fraught with challenging logistics and long lead times; complex with economics, politics, psychology and chemistry. It is a world where a deal that does manage to get completed is filled with so much secrecy over pricing that it is difficult to find out the value of a chemical trade made today, let alone six months from now.
When faced with such obstinate problems, it is usually best to consult someone who knows more about the subject that yourself. An expert such as Paulo Moretti, former Purchasing Director at Dow Chemical and a man who understands the important relationship between the value of crude oil and the price of many basic chemicals including ethylene and propylene. He recently wrote in his excellent blog, the following on why the price of crude oil had crashed since its relatively stable high of around $100 per barrel just a few years ago:
“There are competing theories about the reasons for the Crude Oil price decline. Some conspiracy theorists believe OPEC wants to financially restrict Iran and ISIS, which are both financed by oil exports. Others believe that OPEC wants to decrease the global oil inventory so the price will increase easily. My own view is that global oil prices declined in order to delay Shale Gas (mainly in the U.S.) investments and further production.”
If the OPEC factor is the true reason behind lower oil prices, and consequently a major influence in lower Ethylene and Propylene prices, then it is worth noting that these last few years have seen troubling times for many of those oil rich members.
Low oil prices are close to collapsing the economy in Venezuela, (with the IMF declaring 700% inflation), whilst a recent Deloitte report stated that, “Most OPEC countries have little room to manoeuvre because of their reliance on oil revenues to balance national budgets. These include Iran (where oil prices of around $130/bbl are needed to balance the national budget), Venezuela, Iraq and Nigeria. Unlike the Gulf states (Kuwait, for example, requires a price in the mid-$50/bbl to balance its budget), they have no large foreign exchange reserves to fall back on to sustain state expenditure and the oil price collapse has been exacerbated by existing problems such as sanctions, political instability, security and corruption. Nigeria, for example, has been recently forced to raise interest rates and devalue its currency the naira.”
Even mighty Russia is troubled with anti-Ukraine conflict sanctions and desperately needs a higher oil price to ease the burden, with CNN reporting that, “Russia loses $2 billion for every dollar fall in the global oil price.”
Furthermore, if one of the reasons that oil prices are being kept low is to hamper ISIS (who are also heavily dependent on oil for revenue, then that reason may soon be gone, with the new Russian/US/Turkish/Iraqi coalition expected to push the Islamic State out of its Iraqi stronghold and capital in Mosul within the month (click here for BBC report).
Moretti notes that only one oil dependent country can ride the current period of low oil prices without fear, stating, “Saudi Arabia has $741 billion of currency reserves and posted a $15 billion surplus at the end of its last fiscal year. This means that it can run budget deficits for several years without causing major harm to the country’s finances.”
All of which leads him to predict that, “Crude Oil price will reach an average of US$50/BBL in 2016 and US$60/BBL in 2017. Furthermore, if those oil prices hold true, and with Natural Gas around US$2.70/mmBTU, we may predict the following impact on Ethylene and Propylene.
The above predictions are based on statistical correlation analysis over the last 10 years.”
But Moretti is aware of the near infinite number of factors that go to setting a price for global commodities such as ethylene and propylene, and touches on the relationship between the many chemical products when he writes, “Let us be very clear that the prices of Ethylene and Propylene are driven by the feedstock but also by the supply-demand balance of each one, as well as other derivatives. For example, Ethylene pricing depends on demand for middle-distillate products like gasoline, diesel, and heating oil. Additionally, propane pricing represents a ceiling price for Ethane. As result of all these drivers, Ethylene and Propylene prices have presented a delta (Propylene less Ethylene) between -$5 in 2000 to +$20 in 2011. Therefore, the prices may fluctuate much more than shown here.”
Furthermore it is important to factor in what weather forecasters call the ‘Butterfly Effect’. The concept that a butterfly’s wings beating in China today will affect air pressure, impacting the weather in Rome six months from now. A fact that makes predicting the weather and future chemical prices a thankless task, and leads even an expert such as Moretti to be even more cautious in his predictions, stating, “For now, I propose you check my price predictions at the end of 2017 to see if I was right. If not, sorry; I just gave my view.”
You can read more on Moretti’s predictions and theories on pricing strategy and tools here.
Or look into your own crystal ball and predict the Ethylene and Propylene prices of 2017 yourself.