Europe, US margins pressured by costs - Citigroup

18 August 2006 12:43  [Source: ICIS news]

LONDON (ICIS news)--European and US chemicals firms are struggling with margin pressure due to high feedstock costs, despite higher than expected demand, as customers have started to resist further price increases, according to the latest analysis from Citigroup.

Both in the US and Europe, stock building ahead of the hurricane season, a number of upcoming scheduled turnarounds and expected price increases have led to a rise in demand during the summer months compared with the same period a year ago, the bank’s analysts said on Thursday in a note to clients. .

Despite a rise in demand, however, price increases have been difficult to pass through, and as a result margins have come under pressure in both regions.

"After around two years of strong pricing power for chemical producers, customers are becoming reticent to accept further price increases," the bank's analysts said. “The resistance to price increases is being noted all through the value chain, and it was very evident during the Q2 results season."

In both regions, a slowing of demand for polypropylene (PP) and polyethylene (PE) delayed price increases until August. Although demand for polyvinyl chloride (PVC) has been unusually strong in both the US and Europe, even in these markets it has been difficult to pass on costs downstream.

“The conclusions we draw are that Q3 volumes will probably be good for PVC producers Solvay and Georgia Gulf, but margins are likely to be coming under pressure and stock-building may give rise to higher than usual de-stocking in Q4 as customers run down high levels of inventories,” the analysts said.

In the aromatics chain, styrenics continues to be difficult to operate in, as the market was still in oversupply.

Although the analysts said conditions were worse in Europe than in the US, where if proposed polystyrene price increases go through this would catch up with rising styrene costs. They added that Dow Chemical was in a better position than Nova Chemicals due to the exposure to high benzene costs.

“On the positive side for European producers (BASF, Lanxess), high transportation costs have reduced the levels of Asian imports into Europe.”

Caustic prices continued to fall, as increased demand for chlorine pushed up caustic inventories, and the analysts said they expected prices to decline further, leading to pressure on margins.

US ethylene production rates were expected to be reduced by 7% in August, 6% in September and 15% in October. European ethylene output was forecast to be lowered by 10% in September, 14% in October and 9% in November.

“Although supply outages should keep operating rates fairly high throughout Q3, inventory levels are likely to be high at the start of Q4,” said the analysts. “This leads to a more negative outlook for the final months of the year as purchasers run down stocks into the year-end.”

As both regions experienced feedstocks rises over the summer period, as natural gas continued to rise in the US and naphtha increased in Europe, neither region has feedstock advantage over the other at current prices, Citigroup said.

But it added that with the overall increase in Western input costs, the cost advantage of Middle Eastern production continued to rise.

“For ethylene production, the Middle Eastern cost advantage has risen to $700/tonne, up from around $600/tonne in March,” the analysts said. “This compares to the current spot US ethylene price of just over $1,000/tonne.”

They added that Dow Chemical had recently taken a number of steps to enter the Middle East market, but that BASF due to political risk and its strategic position in Russia had shied away from the region.

“However, with Dow and Aramco announcing the naphtha-based cracker [project] in the Middle East it will be interesting to see whether BASF re-evaluates its lack of Middle East exposure,” said the analysts.

Global utilisation rates for ethylene were expected to remain healthy until 2009, said Citigroup, when Middle East capacity additions began to come online.

Citigroup said that at the moment it would recommend reducing exposure from companies exposed to the commodity chemicals cycle.

It added that its Buy ratings centred around specialty companies with pricing power or pharma hybrid companies, such as Bayer, Akzo Nobel, Syngenta, Lonza, Umicore, Monsanto, Nalco and Lubrizol.

By: Hilde Ovrebekk
+44 20 8652 3214

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly