FocusUS chemical market confidence erodes

07 September 2007 23:35  [Source: ICIS news]

By John Waggoner

HOUSTON (ICIS news)--Market confidence for the US chemical industry eroded this week with mixed economic reports, sources said on Friday.

The Dow closed down almost 250 points, or 1.87%, to 13,113 points as the equities market reacted to Labor Department payroll data as a sign of slower economic growth ahead.

The data on Friday showed 4,000 fewer non-farm payrolls in August, shattering analysts expectations for an increase by some 100,000 in payrolls. While the US unemployment rate held steady at 4.6%, it was the first decline in payrolls in four years.

The American Chemistry Council (ACC) said on Friday that US macroeconomic indicators worsened in the week.

“Job growth and income gains have been the main leg supporting the economy and the reported decline is troubling,” ACC’s chief economist Kevin Swift said in a weekly report on chemistry and economic trends.

Even though the tab of positive indicators slipped to 15 out of 20 in the week, the ACC remained hopeful that market turmoil related to the economy would be contained, citing continued expansion in economic activity from the Fed’s beige book - an important indicator of business sentiment.

“We continue to post a green banner,” the ACC report said.

Bank of America’s equity research team for chemicals also viewed the payroll data as a potential warning sign.

“Today’s weak payroll report portends slower growth, sending chemical shares reeling again with the broader market,” the bank said in a research report.

However, the report suggested that the effects of market turmoil on the chemical companies could be indirect.

“Our initial review of fallout from the sub-prime mortgage collapse suggests that most chemical companies are well positioned to weather the storm,” Bank of America analysts said.

Analysts at Deutsche Bank commented that the employment report arguably took on more significance as it was the last release of official employment data before the Fed’s 18 September meeting to set monetary policy.

“The upshot is that the financial markets may make up their minds regarding what the Fed is going to do well before policy makers have made up their minds,” Deutsche said in a research report on Friday.

Concerns over the moribund US residential construction and auto manufacturing segments continue to weigh on investor sentiment ahead of the Fed’s meeting, when some market observers expect interest rates to be lowered.

Both industries represent significant downstream demand segments for chemicals.

US manufacturers and home builders urged Congress on Friday to reverse energy and tax policies they said are responsible for major job losses in construction and production, warning that the US economy is at risk.

National Association of Manufacturers senior vice president for policy Jay Timmons said the loss of manufacturing jobs is a direct result of Washington’s failure to address the external costs that make it unnecessarily expensive to create jobs.

“Contraction in employment translates into a contraction of spending power and below-trend growth in the second half this year,” Swift said.

Deutsche commented that overall demand for US chemicals should remain modest following Friday’s payroll report.

“We see further evidence that domestic commodity chemicals demand remains lackluster,” Deutsche chemical research analysts said in a report.

By: John Waggoner
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