The global petrochemical industry recovered at an unexpectedly fast pace from the deep economic recession of 2008. In many regions, profitability rebounded to peak levels by the start of 2010, and remained there through H1-2011, as per Nexant Chemsystem. However, market sentiment deteriorated dramatically in Q3-2011, on waning confidence over the global economic outlook and looming fears of the “double dip” recession. Consumption of petrochemicals slowed considerably as leading regional economies faltered. Feedstock costs remained under considerable pressure as crude oil prices stayed stubbornly firm above US$110 per barrel. With markets for most petrochemicals lengthening, margins stalled. Brent crude oil prices remained highly volatile, fluctuating between US$110 and US$120 per barrel, as market sentiment swung in response to publication of contrasting leading economic indicators. Average crude oil prices through July and August eased by a modest US$4 per barrel from Q2-22, to average US$114 per barrel. While naphtha prices dropped briefly to a sixth month low in August, cost savings at naphtha crackers were largely offset by a reduction in the value of C3 and C4 co-products. LPG prices remained at a considerable discount to naphtha, with butane proving a particularly competitive feedstock for flexible crackers. Profitability of petrochemical production was impeded by sharply worsening market sentiment in the third quarter. Petrochem consumption was shattered as consumers and manufacturers suffered a severe loss of confidence in the outlook for the global economy. Consumption in Western economies was particularly hard hit on reduction of the top rating of the United States by several credit rating agencies, as well as intensifying fears over the sustainability of the Euro. Meanwhile, Asian demand continued to be relatively soft and failed to counter the fragile Western demand. Strong Asian economies had been one of the principle drivers of the rapid recovery from the 2008 recession, but Asian markets have been less solid since the start of 2011. The third quarter saw a dramatic change in fortunes for European petrochemical producers, with average profitability across the industry collapsing to its lowest since the global financial crisis took hold at the end of 2009. Nexant’s petrochemical and polymer margin index tumbled over 40% from the average of 150 (Q1-1984=100) posted in the first half of the year. Demand stalled as confidence in sustainability of debts in Greece and several principle Eurozone nations stalled. Supplies of olefins lengthened as most crackers operated reliably, ending a period of tightness in the first half of the year. Modest relief in feedstock costs ultimately proved little comfort to producers who had to surrender margins as market sentiment changed sharply. Regional Petrochemical Industry Profitability (Cash Margin Index Q1-1995=100) Petrochemical markets in the United States weakened in the third quarter, with supply lengthening considerably after cracker outages created shortages in the first half of the year. There were some fears that supply could be disrupted with the onset of the hurricane season in the third quarter, but little production was ultimately lost. Demand was subdued, with consumption of propylene and butadiene derivatives hampered after prices surged to record highs in Q2. Exports of propylene derivatives were heavily curtailed as material was uncompetitive. Average industry margins fell about 15%, dropping to their lowest for six quarters as markets weakened. Asian petrochemical markets weakened steadily through the third quarter, after a brief period of strong demand in the early weeks of July. Demand stalled as a succession of economic indicators pointed to a rapid deterioration in regional economies across the globe. The supply side shortened due to a busy period of maintenance at derivative units, coupled with extensive unplanned outages at several large complexes. Profitability of petrochemical production in the Middle East was preserved in the third quarter, with average export margins maintaining the broad peak achieved since the start of the year. Nexant’s Middle East petrochemical cash margin index eased 1% from its first half average to settle at 150 (Q1-1995=100). Margins on olefins and polyolefins delivered into the European market decreased as confidence in the Euro zone economies deteriorated. Margins for exports into Asia improved modestly, buoyed by tight supplies. Strong polyester markets in Asia, supported a rise in export margins for MEG into both markets. Although Europe apparently offered stronger export margins than Asia, material continued to flow extensively into Asia as Middle Eastern producers aimed to build market share in this key demand centre. Western Europe Petrochemical Industry Sector Profitability (Cash Margin Index Q1-1984=100) All sectors of the petrochemical industry were exposed to the difficult business environment in the third quarter. Intermediates were the only sector to achieve a modest increase in profitability, principally due to seasonal strength in the polyester industry. Asian markets for polyester and intermediates were kept tight by a combination of strong demand and production outages at several sites in the Middle East and Asia. Lapse in polyester sector consumption in late Q2 was reversed as the fibre industry gained momentum in the normal run up to the peak year end season, and bottle grade PET market also performed well. Profitability of the polymer sector was severely depressed in the third quarter, with polyolefins, polystyrene and PVC posting the lowest margins of all the commodity petrochemicals in Europe. Many convertors held high inventories and were reluctant to return to resin purchases after the slow summer holiday period as the economic outlook deteriorated. Nexant’s polymer margin index posted its second lowest rating in the last two decades. Margin continued to be taken up the value chain, at the cracker, with non-integrated producers struggling to achieve variable cost breakeven at times.