INSIGHT: A fear of what might lie ahead

26 November 2007 16:24  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--A disturbing report on the PVC (polyvinyl chloride) business gives a taste of what might yet come in European chemicals.

Producers are finding it hard to push through price increases. Buyers are worried about the global economy and the impact of a possible downturn on construction: some pipe grades just aren’t selling. November prices have been assessed down.

It is not so much that demand is slackening generally, but that buyers are being understandably cautious in a fragile market. The US sub-prime mortgage crisis continues to work its way into the fabric of the global economy. Concern about the weakening US dollar grows daily.

The question now has to be whether business expects to take the shift to $100/bbl-plus oil in its stride.

January Brent futures nudged a new record on Monday. In the European morning it looked as though WTI (West Texas Intermediate) could push past the psychologically important $100/bbl barrier. Naphtha in Europe has hit another high – although there are few buyers at this level.

The robustness of chemicals markets is being tested and the next few months look difficult. Upstream, producer margins have been clearly pressured by higher priced feedstocks. Companies talk about the impact of higher energy and transport costs.

ICIS pricing data show that integrated injection moulding grade high density polyethylene (HDPE) producer margins in Europe were more than €300/tonne lower in November than in August.

Polyethylene prices have not fallen that much but naphtha cost increases have hit hard. The downturn is partly seasonal but margins are now significantly below the six month rolling average.

Producing companies continue to push for price increases. Some may be successful but the point in the chain where the producer hands over pricing advantage to the buyer is shifting.

A turn down in construction-related markets might be expected given the impact of the sub-prime mortgage crisis on new home building. Financial analysts warn, however, the full fall-out has yet to be felt in the wider market.

And remember that the chemicals business tends to react quickly to changes in key end-use markets in the wider economy.

“It is a very nervous time for us at the moment,” one European PVC seller said last week. “We don’t know where the ethylene contract will settle, but it could well be an increase.

"This is all crystal ball gazing, but if so, we may have to try and push for an increase in December. That will be very difficult,” the source added.

Cost pressure is being felt across the board. French chemicals group Rhodia last week took the unusual step of announcing corporation wide price increases of between 5% and 15%. Swiss specialties maker Clariant followed suit on Monday saying it was aiming 5% to 12% higher.

Rhodia probably has more chance of getting what it wants than the Switzerland-based specialties maker. The French group has some momentum behind it. Clariant could only achieve a 1% increase in prices over the first nine months of the year and nowhere near the increases it (something like 30%) wanted from July.

The situation is difficult for all players because it is not just oil-based raw material costs that are rising. Commodities prices are higher. European energy costs are volatile and expected to rise next year as carbon control begins to bite.

The future is not yet bleak for European chemicals but there are reasons why chemicals business confidence, as measured by the European Commission, is down. Executives may not be able to see into the future but they know they have to prepare for what might lie ahead.

By: Nigel Davis
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