Oil price rises generate further uncertainty for chemicals

09 April 2002 17:38  [Source: ICIS news]

American Chemistry Council (ACC) senior economist, Martha Moore, puts it succinctly. "The recent run-up in oil (and natural gas) prices is troublesome," she says. "Oil prices closed above $27 a barrel twice during the week ending 5 April. About $6 of this represents a risk premium (arising) from the political uncertainties in the Middle East. Higher oil prices could derail the recovery resulting in the dreaded W scenario." She adds that every post-World War II recession has been preceded by a rise in energy costs.

Chemical volumes are certainly higher now than just a few weeks ago and there is a greater feeling of optimism on both sides of the Atlantic. Supply has tightened markedly in Asia. But there is concern that recovery could be slow, at best, if it is not stalled by increasing uncertainty driven largely by the global political situation.

US data are pointing to a mixed response to the better outlook. The American manufacturing sector has turned up, housing activity remains strong and vehicle sales are relatively high. Sequential, month by month growth for some chemicals and plastics has been stronger than expected signalling a filling of inventories. On the other hand, chemical producers’ inventories are building too so there is a trade off with end use demand.

Producers are being hit by still high energy costs and the strength of the US dollar so there is little surprise that shipment revenues are 6.0% lower for February 2002 compared with February 2001. February shipment volumes are reportedly 4.0% lower. The ACC remains concerned that the dollar’s strength will continue to hurt exports and that the chemicals trade balance will be negative in 2002 - for the first time in 75 years.

Certainly, the chemicals upturn is difficult to call now as there is still so much uncertainty. The ACC statistics show how much lower volumes and prices were in February for many different chemicals. The downturn has not been confined to any one segment. US pharmaceutical volume shipments were down 12.3% in February, for instance, and prices only 1.8% higher than in the prior year. Basic chemicals volumes were still lower but prices were well down. Petrochemicals volumes were 1.9% lower in February but prices were down 12.5%. That is hardly surprising. Producers have not been able to raise prices given the overriding economic uncertainty and the fact that feedstock prices were as much as 34% lower than in February 2001.

ACC’s statistics indicate that the bottom may have been reached in inorganics, petrochemicals and organic intermediates. In other words, volume falls are moderating in these products. In polyethylene, PVC (polyvinyl chloride), engineering plastics and titanium dioxide there has been some month-to-month volume growth. Also, there is growing evidence of a shipment upturn in specialties.

The ACC numbers give increasing cause for optimism but they do not as yet signal any clear return to growth and certainly little in the way of a return to better profitability. That sentiment is reflected in just released survey results from business advisors KPMG. They show that 44% of US chemical industry chief executives do not expect the business environment to improve until the first half of 2003. As many as 14% of respondents don’t expect an upturn until the second quarter next year.

Indeed, just 28% foresee an upturn in the second half of this year. Not surprisingly, most industry executives are most concerned about the economic environment and just when the turnaround will come. The economic downturn has taken a particular toll on business men and women who see it of critical importance to the sector compared with past replies which have put energy, the environment and public perception at the top of their worry list. Unfortunately, it looks as though they will have to worry a while longer.

By: Nigel Davis
+44 20 8652 3214

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