INSIGHT: Chems brace for US housing slump

10 July 2007 17:04  [Source: ICIS news]

By Mark Watts


LONDON (ICIS news)--As the US economy heads towards a housing market slump, commodity chemicals producers will struggle to pass off higher feedstock cost-fuelled product prices amid slowing consumer demand.


Cracker operators in the US will find it hard to pull off significant price hikes for olefins despite the current favourable economics for derivatives exports, with North American ethylene demand weaker than expected in the first half.


Reports this week point to US home sales dropping to their lowest level since the start of the five-year housing boom in 2001, as mortgage rates and foreclosures increase.


US manufacturing growth will also slow significantly this year as the nation's GDP growth decelerates.


The first quarter of 2007 saw the lowest growth (0.6%) in five years, causing the US president's Council of Economic Advisers to temper its domestic GDP growth outlook for this year to 2.3% from an earlier forecast of 2.9%.


The housing slowdown is also affecting pricing and volume for paints, durables and carpets. Pricing is a larger concern than volume because the cost of oil has recently increased, squeezing margins.


Many commentators have predicted the housing slump will carry on into 2008.


Demand for polyvinyl chloride (PVC) pipes and insulation is affected too, while a general slowdown in manufacturing and overall production is certain to have wider consequences for the industry.


Analysts at Deutsche Bank in New York predict softer demand trends in the commodity chemicals sector with a slowing momentum in consumer spending continuing in the second half of 2007.


This was subject to the combined impact of mortgage resets, negative housing wealth effects, high energy costs, low personal savings and high household debt burdens.


Although ethylene producers have nominated a July contract price increase of 3-5 cents/lb, downstream demand is only expected to support a 1 cent/lb increase.


Ethylene margins were expected to remain in their current mid-cycle territory of under 10 cents/lb.


“For the balance of 2007, we believe that a muted supply/demand outlook and a generally high feedstock cost environment will challenge ethylene markets entering 2008 when the industry is expected to transition into a cyclical trough,” said Deutsche Bank.


Olefins spot prices shot up recently, while contract prices have inched up but demand from derivatives is largely soft, particularly polypropylene.


Among the major olefins derivatives however, polyethylene is seeing above average demand due to good export economics.


Demand for polypropylene (PP) has been particularly soft. Propylene prices shot up earlier this year due to refinery problems and PP demand could not keep up with the rise.


Despite the downturn in overall economic growth, a recent report by the Institute for Supply Management showed an improvement in US manufacturing in June. Also, US jobs were being created faster than expected, according to Kevin Swift, chief economist of the American Chemical Council (ACC), with 132,000 non-farm working jobs created in June.


“It is these steady gains in employment coupled with rising earnings - from a tight labour market - that are largely supporting consumer spending and the economy,” Swift told ICIS news last week.


Perhaps this tiny ray of hope might just help provide the platform for chemical product demand to recover.


By: Mark Watts
+44 20 8652 3214

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