The $3 trillion petrochemical market is in danger of freefall if oil prices continue to sink.

Altogether, petrochemical prices are down 14% from May to June, and that's crimping leading PC stocks (most of them located outside the U.S.). But one PC stock may be on the comeback trail, thanks to reports of a major purchase of a U.S. natural gas giant.

First things first. Judging from Platts’ benchmark Global Petrochemical Index for the month of June, the entire global petrochemical market is valued at about $3 trillion, with prices down $175 for the month, to $1,104 per metric ton.

The Platts index is based on seven common petrochemicals, including ethylene, which fell 21% in June, and paraxylene prices, which slid 16% for the month. Another widely used petrochemical, propylene, declined by14%.

Overall, that 14% decline is the largest 30-day decline in four years, when petrochemical prices plummeted 38% in November 2008, just as the global recession fell like a neutron bomb on global economies.

Things aren’t that bad now with petrochemicals. A closer look at the numbers reveals an 11% price decline in May 2012, so the last 60 days have seen a 25% price decline in petrochemicals.

That’s not exactly a loss of 38%, but it’s not the land of milk and honey, either.

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Petrochemical Prices In Sharp Decline

June ’12 Monthly % Change June ’11 May ’12 April ‘12

$1,104 -14% $1,385 $1,279 $1,444

Source: Platts
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Why the fallout in petrochemical prices?

Platts analysts point to a significant drop in crude oil prices (oil prices fell from $126 per barrel in March to $89 per barrel in June), and tepid overall demand for petrochemical products in 2012. From March to the end of June 2012, the Platts naphtha index has slid by 35%.

Platts defines naphtha as “a primary raw material input that produces olefins, which are the key ingredients in the manufacturing of other petrochemicals and polymers.”

“The price drop in crude oil and naphtha that began in March triggered a knock-on decline in global olefins prices, with propylene and ethylene both dropping about 30% since mid March,” notes Jim Foster, Platts senior editor of petrochemical analytics.

“While the rebound in crude oil and naphtha the last two weeks appears to be helping olefins bottom out, any olefins price rebound will be tempered by continued weak demand and rising inventories.”

Since, as Platts points out, all seven components of its petrochemical index were down for the month of June, that can’t be good news for petrochemical stocks. Petrochemical stocks are largely down over the past 30 days, even as the Dow Jones Industrial Average was up 4%, and both the Nikkei 225 and London Stock Exchange Index (FTSE) rose by 5% from May to June.

Consider one of the leading global petrochemical producers, Sinopec Shanghai Petrochemical Co. Ltd. On February 15, SHI was trading around $42 per share. On July 10, Sinopec was trading at $28 per share but could be looking at a bounce-back as oil prices rise this summer.

The Forbes Energy Stock Channel blog says SHI is in “oversold territory” and suggests that its downward dip is stabilizing, and may even be rising.

“A bullish investor could look at SHI as a sign that the recent heavy selling is in the process of exhausting itself, and begin to look for entry-point opportunities on the buy side,” says Forbes.

Sinopec is 55% government-owned, which gives it some flexibility in waiting out tough economic conditions on the level of the first half of 2012. Zacks Investment Research says that flexibility might come in handy in the second half of 2012 -- but only in one segment.

“We are maintaining our long-term Neutral recommendation on the company,” says Zacks, in a recent research note. “Sinopec Shanghai is poised to benefit from the country’s continuous demand growth and its strategic positioning in a fast-growing economy. We also like Sinopec Shanghai’s unique vertically-integrated business model, whereby the company can use its intermediate petrochemicals in manufacturing downstream products.”

“However, a downstream-centric assets portfolio and government caps on refined product prices remain concerns. In particular, the bearish refining margin outlook has become a major liability, in our view.”

Major business media outlets (including Reuters, Forbes, and the Financial Times) are buzzing about a potential Sinopec buyout of Chesapeake Energy’s financial assets. Chesapeake has long been rumored to be looking for a buyer, with $11.5 billion of Chesapeake assets on the block. It’s no secret among energy traders that the natural gas company needs to raise cash to fund its operations, and the sooner the better.

As Sinopec imports about 75% of its crude oil, and is widely known as a downstream specialist, and traders know that the company is actively looking for an overseas energy producer to link arms with. Chesapeake, it would seem, fits that bill.

Meanwhile, as Sinopec takes a long-term view, so do some analysts in their outlook for the global petrochemical market.

U.K.-based Visiongain, in its recently released Petrochemicals Market 2012-2022 report, says that the global petrochemicals market is primed for growth, despite a wretched first half of 2012. Taking the Sinopec angle one step further, Visiongain says Asia will be the epicenter for an industry that should hit $609.3 billion in assets in 2012, “as companies and organizations across the world continue to exploit the potential of the burgeoning Asian markets.”

That said, the Visiongain report says that short-term growth may be weak, with the longer gains recorded after 2015, thanks to a lousy global economy.

“The global petrochemicals market has shown sluggish growth in recent times and this has been due to poor demand and poor global economic conditions,” says Visiongain.

“The petrochemicals market is a market that is highly dependent on the macroeconomic conditions and, due to the prevailing, economic conditions, the European petrochemicals markets have performed particularly poorly.”

That seems to aptly sum up the current state of affairs in the global petrochemical market, for producers and refiners alike. But growth is coming, albeit as impatient investors see that growth coming at a glacial pace.

That’s why, for now, so many analysts, traders, and money managers see petrochemicals as a decent long-term pay, but not a barnburner in 2012.