10 January 2000 00:00 [Source: ICB]. . . that is the outlook for the global chemical industry. Simon Robinson examines some predictions for the sector over the coming 12 months
The Organisation for Economic Cooperation and Development (OECD), the club of developed nations, believes prospects for world growth have 'improved substantially over the past few months'. It predicts growth in the OECD averaging around 3% in 1999 and the same in 2000 before slowing to around 2.5% in 2001.
It also predicts world growth running at around 3.5% in 2000 and 2001. It bases its optimism on slightly better growth in the EU, continued growth in the US and a 'more rapid resumption of growth in Japan and in particular Korea'.
At the same time, it suggests overall unemployment will edge down with 'substantial job creation in the European Union'. This should reduce unemployment within the EU by around 2.5m between 1998 and 2001.
Outside the OECD area, economic activity in the less developed world is projected to recover earlier and more sharply, especially in most of the Asian economies. However, the group warns that Russian and South American economies are still 'fragile'.
The prolonged period of growth could mean that companies are working close to their theoretical capacities by the end of the period.
However, it is not all sweetness and light ahead. The OECD is concerned that if the yen continues to appreciate significantly over the course of 2000, this could have significant effects on other economies in the Asia-Pacific region. Similarly, increases in interest rates in the region could have an effect on other regional economies.
The OECD is concerned that as the crises affecting Korean and other Asian emerging economies seem to have stopped, so restructuring there may also stop before the necessary changes have taken place.
South American economies are vulnerable to changes in interest rates, says the OECD.
In Europe, the OECD says that there has been a marked fall in the level of unemployment and the growth of employment in some sectors has been much higher than expected. The group suggests that it is possible that the increase in employment has been caused, to some extent, by more widespread implementation of labour and product market reforms.
However, despite the benefits of a weak euro, the improvement in the European economy is mostly cyclical. The OECD warns that this could be misconstrued as an improvement in the underlying financial strength and efficiencies of individual economies. This would be a mistake and financial prudence should continue.
Relaxing the tight fiscal stance 'would represent a repeat of the policy mistakes made in the late 1980s and early 1990sÉthis would be unfortunate, as in many countries further fiscal consolidation is necessary', says the group.
'To improve Europe's financial stability and help to underpin longer term economic growth, countries which find themselves with a budgetary surplus should use this to reduced their national debts. Tax cuts should only be made 'in the context of further progress over a broad range of structural reforms.'
The good news for Europe is that the OECD believes there is a significant output gap between demand and production which will enable the continent to grow at around 3% for the next two years without 'significant area-wide inflationary pressures'.
However, the OECD points out that 'some euro area countries already face pressures on capacity with a risk that prices could accelerate'. This would lead to 'competitive losses if they do not undertake sufficient structural reform or fiscal tightening'.
So how is this playing out in the real world of the European chemical industries. Malcolm Mitchell of BP Amoco told Cefic's economics conference in November last year that there was a 'more up-beat tone' among the speakers. However, he warned there are 'very real issues of concern', which relate primarily to profitability and to the regulatory backdrop against which the European industry is expected to compete in global markets.
Mitchell believed that during the first half of 1999 the European chemical industry was weighed down by high inventory levels. However, 'the cycle is about to turn and this will add considerable, if temporary, momentum to the upswing'.
Mitchell's view on the growth potential of the EU coincides with that of the OECD. 'Structural reform', he says, 'is arresting inflation, changing the traditional price/growth trade-off.' This is supported by the Dutch, Spanish and UK economies which are at 'operating rates beyond critical extreme but where price and wage pressures remain quiescent'.
'The European economy is moving into a period of solid and broadly based growth,' sustainable into 2000 and beyond, says Mitchell. There will be a 'quality and security of growth which will not be denied', he says. Confidence in the European chemical industry was soaring towards the end of 1999 for production outlook and exports.
Translating this confidence into numbers shows chemical production is set to grow by 3.25% in 2000 - almost a full percentage point ahead of 1999 - and reflects chemicals traditional role as a harbinger of overall economic upturn. All of Europe, with the exception of the Dutch chemical industry, is predicting growth, with France and Germany looking particularly strong. Positive outcomes are expected across the board for the chemicals sector, with organic and plastics prominent, says Mitchell. He adds that price rises are expected across chemicals broadly in line with inflation across the region. Passing on the 123% increase in the price of crude oil should be seen as the minimum necessary if 'the industry is to begin to restore profitability levels which are acceptable to stakeholders'.
The Dutch chemicals industry association (VNCI) says that growth is likely to continue in 2000 following a 2% increase in turnover and production in 1999 compared to 1998 and stable prices.
The VNCI says that Europe's export position improved sharply in the last quarter of 1999 with the devaluation of the euro. This year's dramatic increase in the price of crude oil has fed through into petrochemical feedstocks and is likely to filter along the chemicals chain to other products as 2000 progresses, says the VNCI.
In the UK, the Chemical Industries Association (CIA) says that output 'recovered strongly and rose by 1.9% between January and October 1999. Export volumes increased by 6% over the first three quarters of the year and there was almost a 15% year-on-year increase in quarter three. Early year gains were generated by the pharmaceutical industry which has grown at 'double digit rates' through the year. By the third quarter most other chemical sectors had started to pick up too. There was a 20% increase in exports to non-EU countries in quarter three, despite the rapidly increasing value of sterling.
The CIA says that the UK will comfortably outstrip most other national estimates of output in 2000, with a rise of around 4.5% expected. This is presuming that the global economy remains benign.
The OECD says that the US economy will continue to operate at 'above potential' following eight years of growth, the last three of which have seen the US economy motoring along at 4%/year.
The group says that there is little sign of any internal process in the US to cut this growth; labour is tight, for example. However, there is likely to be a tightening in monetary policy but this will have to be managed carefully to prevent crashes in the stock, bond and foreign exchanges.
This bullish outlook is reflected in the Chemical Manufacturers Association's (CMA) outlook figures with a 5.8% increase in chemicals shipments expected for 2000 to $436bn and post-tax profits up 12.3% on 1999. This will set the stage for higher dividends, greater investment and research and development in the year.
The US' positive trade balance in chemicals is expected to shrink from $7.5bn in 1999 to $6.5bn by the end of 2000. Basic chemicals look set to lead the way in terms of post-tax margin growth, with post-tax profits set to grow by around 14.8% over the year, according to the CMA which says that the US chemicals economy is likely to grow by 2.5%.
However, production of industrial chemicals increased by only 0.25% in 1999 because of import competition, the relative strength of the dollar and the crisis in Asia. Despite extra capacity coming onstream, US producers remain optimistic for 2000.
The long-term prospects for US chemical trade are mixed, according to the CMA, with the appreciation of the dollar compared to the euro precluding 'any quick improvement of the trade deficit with western Europe'. The CMA believes, however, that export demand will recover over the year and that it is likely to grow by around 4.5% to $71bn in 2000. Within the US, domestic demand is likely to slow slightly.
Demand from the food, appliance and home furnishing sectors will provide 'backbone', suggests the CMA. 'Intermediate' growth levels can be expected from electronic components, rubber and plastic products.
Worryingly for speciality chemicals producers, supply chain management practices by large purchasers are beginning to erode the value-in-use pricing basis of many speciality chemicals. This problem was made worse in 1999 by overcapacity in a number of sectors, and is likely to continue into 2000.
Shipments of speciality chemicals are expected to increase in the US by 4.75% in 2000, down slightly from 5% in 1999. This sector will lag chemicals as a whole which will see shipments increase by 6.5% to $192.5bn.
Mitchell suggests that this is the third time in a decade that the European economy has benefited from a revival of global activity and supportive economic policies such as in 1993 and 1996. 'European industrial activity rose at over 5%/year' in these previous years, he says. Europe, at least, looks set to enter the new millennium with 'all cylinders firing'.
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