07 September 2007 16:15 [Source: ICIS news]
By Nigel Davis
Turmoil in the world’s financial markets has yet to demonstrably spill over into the wider economy or into manufacturing. Yet there can be little doubt that there will be an impact on growth. August economic and sector indicators are awaited with more than passing interest.
Petrochemical prices have come under pressure as oil prices have weakened this year. The ICIS Petrochemical Index (IPEX) for September fell 0.4% to a reading of 273.69 points from 274.87 in August, as the overall energy price decline coupled with foreign exchange movements to halt an upward trend. The index charted rising prices over the previous four months.
Economic growth forecasts have been cut back as might be expected given the way the credit worries spread turmoil around the world’s financial markets.
Citigroup, for instance, has trimmed its estimate for 2007 global GDP (gross domestic product) growth by 10 basis points to 3.6% to take into account the expected fall out from the US sub-prime mortgage lending crisis. It is worth noting, though, that the forecast is still stronger than it was at the start of the year.
Chemicals generally are doing well, benefiting particularly from
Citigroup’s sector analysts, however, point to the fact that generally in chemicals the pace of price increases had fallen sharply this year. “The price slowdown, if sustained, will tend to put downward pressure on the more commodity-oriented parts of the sector in 2008,” they say.
The bank’s September pan-Europe sector update also highlights concern over the adverse impact of exchange rate movements on sales for European companies.
“It implies sluggish third-quarter overall sales growth for the sector but with margins remaining relatively robust,” it says.
Second-quarter volume growth for the companies in the Citigroup chemicals universe was higher on a quarter-to-quarter basis and compared well with the similar quarter of last year. Pricing momentum clearly slowed, however, with the growth in prices for commodity players declining more steeply.
Against that sort of backdrop it pays to be concerned about the ability of the commodity parts of the business to maintain a relatively high rate of top line growth into 2008.
Citigroup makes the point that it may pay investors to look more closely at companies involved with some of the potentially stronger growth drivers for the sector such as emission reduction legislation, the biosciences and clean energy.
The stock market turmoil of the past six weeks has taken its toll but the sector has outperformed the market by more than 15% over the past 12 months.
Shares in BASF, Bayer, ICI, Umicore and agrochemicals producer Makhteshim Agan had risen in value by more than 25% in the year to 5 September. That rate compares with growth in the Dow Jones Stoxx index of 3.2% and its chemicals EuroStoxx index of 21.5%.
Many of the sector’s products remain highly vulnerable to cyclicality and slower GDP growth though. That is why businesses related to the biosciences, catalysts markets or environmental technologies are looking increasingly attractive.
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