US chemicals - wallowing in the trough?

08 May 2001 16:19  [Source: ICIS news]

The feeling of some in the US industry that the slump will continue into the third and fourth quarters is not necessarily reflected in the latest statistical data for chemicals.

Certainly the figures are bad but the sector’s economic analysts are talking now about the first signs of a turnaround. The official figures are suggesting that the industry is in the trough. Some recovery over the next few months is increasingly likely.

The operating environment is challenging to say the least but clearly not as bad as it was at the end of last year. These are hard times for the US chemical industry. Demand has slumped but energy and feedstock costs, although much higher than they were, are not at the astronomical levels of the year end.

Official data for March highlights the weakness of all business linked to the US manufacturing sector. Chemicals sales revenues were up 1.7% on March last year but volumes were down 1.7%. Exports were up 10% pushed to probably unsustainable levels by the weakness of domestic demand.

Industrial chemicals are bearing the brunt of the downturn and the rise in feedstock and energy costs. Specialities are doing much better but pushing through higher input costs has been difficult. There is little evidence yet of problems in manufacturing hitting demand in consumer specialities.

It is not so much the point that some specialities are holding their own in the current operating environment, rather that it does look as though the bottom of the cycle has been reached in industrial chemicals. The more general business and economic indicators in the US, although bad, do seem to be saying that the economic slump has hit bottom. And it is a question of when the economy itself begins to pick up. Investor sentiment clearly is changing - and this is not just a move away from high technology stocks and shares - and looking more towards a period of recovery now rather than a further slump into recession.

Bulk chemicals tend to lead industry into and out of the peaks and troughs of performance. And although it may be too early to talk of a lift off just yet, chemicals can be expected to bump along the bottom of this current cycle for a while before there are concrete signs of a pick up, and not drop further.

The data for industrial chemicals reflect a very difficult business environment. Sales are down 4.6% compared with a year ago, according to data just released by the American Chemistry Council (ACC). The fall of sales of downstream derivatives and other industrial chemicals is worse, at 7.1%. The ACC says that ‘shipments’ (sales) of petrochemicals and intermediates were down 2.6% in March but that it appears a trough may have been reached. Inorganics sales were up 2.6% for the month.

Export sales have boomed over the past year but ACC says that a turning point may have been reached in the drop in domestic demand they have offset. The drop in industrial chemicals sales was exacerbated by the fact that US industrial chemicals production fell 10% compared with the year earlier.

Industrial chemicals prices fell on a month by month basis, apart those for plastics and rubber, which has had an impact on sales in April but on an annual basis they are still up 6.7%. Input costs have come down too but feedstock prices are still almost 11% higher than in March a year ago.

How long industrial chemicals are in the trough of the cycle remains to be seen but the segment will continue to suffer from low domestic demand, some drop off in exports and high feedstock costs over the coming months. New capacity will continue to have an impact on operating rates and margins but that will eventually begin to ease. Higher domestic US sales will bring obvious relief.

The speciality chemicals segment continues to grow in spite of the nation’s economic woes but growth has slowed. The data show sales up 4.7% compared to a year earlier with growth particularly in adhesives, food additives and industrial gases. Sales fell in March for coatings and in electronic chemicals which has been hit by the troubles in the technology sector. Fine chemicals has been hit by lower sales growth and overcapacity.

Exports have played an important role in specialities this year but the rebound in export demand has begun to slow. In consumer products, exports have given an added boost to only slightly lower domestic demand growth.

By: Nigel Davis
+44 20 8652 3214

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