FocusIndustry outlook positive despite bad news

31 August 2007 22:22  [Source: ICIS news]

By John Waggoner

HOUSTON (ICIS news)--The US chemical industry outlook through the rest of the year looks positive despite bad news for housing and automotive sectors, the American Chemistry Council (ACC) said on Friday.

“On the positive side, personal income and consumer spending in July both posted good gains and the Fed’s preferred measure of inflation moderated,” the ACC said. “Moreover, factory orders, shipments and order backlogs posted very large gains, suggesting strength in manufacturing.”

Recent turbulence in the credit markets represents more downside risk to the growth outlook in the second half, Deutsche Bank said in a research report on Thursday, citing diminished confidence in growth.

US gross domestic product (GDP) grew at an annual rate of 4% in the second quarter of 2007, the fastest since the second quarter of 2006, according to a preliminary estimate by the US Bureau of Economic Analysis (BEA) on Thursday.

“While backward-looking economic data (retail sales, durable goods orders, new home sales) have surpassed expectations lately, our economics team expects evidence of macroeconomic contagion from recent credit events will await the reporting of August and September data,” Deutsche said.

Friday’s comments by Fed Chairman Ben Bernanke and President George Bush appeared to calm market fears of the credit crisis in August, sparked by the erosion of guarantees in mortgage-backed securities.

According to a report in the Wall Street Journal on Friday, hedge funds are already looking for opportunities to snap up these distressed securities on the cheap, which suggests to some observers that the end of the crisis may be near.

Bernanke said the Fed was prepared to “act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.”

Major trading indices wavered on Friday but extended their gains into the afternoon after President George Bush detailed plans to help borrowers who fear losing their homes to a market that continues to deflate.

“Amidst gut-wrenching volatility, the S&P Chemicals index actually rose in August, as did the S&P 500,” Bank of America said on Friday in a research report.

The US housing sector continues to fuel fears of decreased demand for chemicals through the end of the year.

“The woes in this sector are clearly affecting consumer confidence,” the ACC said.

The supply of existing houses for sale in the US has ballooned to a 16-year high of 9.6 months at current levels of demand in a trend that could sap the strength from the nation's already weak new-home industry.

According to the National Association of Realtors (NAR), in July, the supply of new houses rose 5.1% to reach 4.59m residences. At existing levels of demand, the inventory of used homes for sale would take well over six months to deplete, far beyond the point realtors consider balanced for the market.

Average sales prices for US houses dropped by their largest amount in 20 years, Standard & Poor's (S&P) said on Tuesday, in a further blow to chemical producers dependent on residential markets.

Any weakness in new home construction could negatively affect an important end market for a wide range of chemicals, especially polyvinyl chloride (PVC).

“The downside potential to the economy has heightened as investors are risk adverse,” the ACC said in its commentary on Friday.

According to ACC chief economist Kevin Swift, North America’s housing and auto markets will begin to recover in 2008.

The tightening credit in the US has yet to slow down commercial construction, a large end-market for plastics and other chemicals, an economist said on Thursday.

"Everyone in my association is keeping their fingers crossed that it will stay strong," said Ken Simonson, an economist for the Associated General Contractors of America (AGC) a trade group that represents the commercial construction industry.

“We continue to expect modest demand for US chemicals,” Deutsche said in its report, suggesting that performance in the sector will remain highly selective.

By: John Waggoner
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