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Global outlook

Need Is Still “Stability Anchor” of Chemical Industry

2014/11/17 China Securities Journal

Affected by the slowdown in economic growth of global economy, increased production in main oil producing countries, dollar upvaluation and other factors, international oil price began fall every month since June of this year. Especially since August, oil price have dropped with a greatly high speed. From October to now, more than one month, oil price in New York fell a cumulative 15.3% and Brent fell nearly15.1%. Up to 14^th November, Brent crude oil futures fell 2.46 dollars, 77.92 dollars a barrel at the close in December which reached a recent low.

Oil is an important chemical material and a big drop in its price has a strong influence on overall profitability of chemical industry. In general, the oil price drop gets the end price of sub-sectors of chemical industry with over capacity to further lose supports and this influence does more harm than good in a short term. While those sub-sectors of chemical industry with better needs or downstream dedicated may be the beneficiaries of the drop. Need is still the determining factor of deciding end product prices and profitability of chemical industry.

Negative effects in the short run

In petrochemical industry, crude oil is usually processed to naphtha in advance and the naphtha crack to produce olefins, arene and other basic materials then produce all kinds of chemical products on this basis.

Generally speaking, oil price drop has a certain influence on profession cost and inventory value. Considered historical data, the changes in profit of major sub-sectors of chemical industry have a positive correlation with oil price.

Recent data showed that with the dual influences of low international oil price and market needs, the relevant products of petrochemical industry lost cost support and with the conduction effect of industry chain, the prices all fell. The prices of refinery, olefins, arene and other chemical products fell in this week, among which propane (Qingdao refiner), ethylene (korea FOB), purified petroleum benzin (Huadong) fell 9.4%, 5.4%, 5.1% respectively. The declines of main products prices were even larger than the drop of recent international crude oil prices.

On the other hand, the oil price drop will hit already low market minds. As the “wind vane” of chemical industry, international oil kept falling in the latter half of this year which leads to tired dealing of international merchants, much more prudence of domestic receiving parties and dealers and increased acquisition on-demand. Within positive competitions of market, upstream and downstream suppliers and demanders, market pricing power is gradually transferred to domestic dealers and downstream demand side.

Analysts point out that crude oil price drop influences downstream inventory willingness of chemical products and then drives the fall of chemical product prices together with cost factor. At the same time, all sub-industry’s profits suffer the impact of the fall of finished products value and raw material inventory value. Majority of sub-sectors of chemical industry suffer a short-term impact. Relatively speaking, the enterprises with high rate of stock turnover have not been seriously affected because of its limited inventory fall.

Downstream sub-industries benefit directly from this drop in the medium term

In the medium term, some sub-industries with steady or better supply and demand pattern relation, fine chemical engineering and other downstream sub-industries benefit directly from this oil price drop.

With the fall of the cost of product materials, there is a larger room for improving earning power of relevant industries. Those sub-industries or products mainly includes MDI, pesticide, intermediate, chemical products related to new energy, electronic chemicals, some rubber chemicals, dye, textile assistant and so on.

On the other hand, the fall of oil price also bring cost advantages for some chemical routes of oil as feed. Some sub-industries whose product prices are decided by routes of coal as feed or nature gas as feed will benefit from this fall, such as, some ethylene method PVC adopt petroleum routes and some other sub-industries.

Besides, the cost of raw material in additives industries accounts for about 90% of production cost. While more than 60% raw materials are petrochemical products. The drop after rise of oil price will bring sharp fall for product costs.

Minsheng securities research report indicates that with the oil price drop, cost reduction of main additive products, together with low concentration of additive industry, the probability of merger and reorganization is increasing step by step in the context of economic slowdown and state economic transition. With the double benefits, company performance is expected to be significantly improved.