INSIGHT: Growth slowdown threatens US/Europe

03 December 2007 17:22  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Chemicals demand and production growth is slowing but forecasters still feel that 2008 will be a good year, depending on where in the world you are.

All sector players have to be concerned about leading indicators in the US that point to close to recessionary conditions.

Chemicals output growth has contracted over the past few months in all regions, with the impact most pronounced in Europe and North America. It is likely to be hit further.

The situation is not fragile yet but chemicals makers face up to it in a marketplace of strong economic headwinds.

So much rests currently with the US consumer, the expectations of whom dropped sharply in October to the lowest level in two years.

US housing permits were down sharply in October as the mortgage credit crunch bit hard. New housing starts were down and the non-residential sector alongside public construction was no longer able to make up the shortfall.

In its latest weekly economic trends report, the American Chemistry Council noted that the US Federal Reserve’s Conference Board index of leading economic indicators (LEI) was down yet again in November and had fallen generally, year-on-year, over the past six months.

Industrial production, so critical to demand for basic and speciality chemicals, tends to follow year-on-year changes in the LEI.

The downside risks to growth are gathering although the big question is how badly the rest of the world will feel the chill should the US economy catch a real cold?

Production growth slowed markedly in the regional US last month, with a steep decline in activity in bulk petrochemicals and organic intermediates and in synthetic plastics and rubbers.

Looked at on a global basis, the growth picture is mixed although the trend is downward, suggesting, the ACC says, that the growth cycle has reached its peak and that slowing activity is likely.

The early data suggest that production output growth slowed in western Europe last month. Growth in central and eastern Europe was not a strong as earlier in the year.

By contract, China continues to show strong year-on-year gains in growth alongside countries such as India, South Korea and Taiwan.

Growth in Latin America has moderated somewhat in recent months but Brazil’s growth track continues strongly upward.

Against the growth backdrop, volatile feedstock and energy costs hurt all and the weaker US dollar some more than others. And it is no wonder companies are worried about prices and how they might continue to be able to pass on higher costs.

Cost volatility is a particular problem. Oil prices dropped almost $10 a barrel last week and fluctuated by $3/bbl on one day. The oil market is driven by speculation as investment funds look for opportunities in commodities that can’t be found elsewhere.

Chemicals growth forecasters take much of this in their stride but warn that the ‘triad’ regions of North America, Western Europe and Japan face difficult times.

“If the weakness in housing markets intensifies and central banks cannot reduce interest rates because of inflation worries, then 2008 could be a very flat year,” UK-based Oxford Economics warned last week.

Triad output could grow at under 1% in 2008, it suggested, against a base case forecast of 2.3% for the sector including pharmaceuticals. The forecasting group is suggesting that triad chemicals growth will be 0.75% this year.

The European and Japanese chemical industries would suffer most if the oil price stays high and the US dollar remains weak.

World growth, including pharmaceuticals, could be as strong as 4.75% next year, up from 4% in 2007 driven by emerging market growth of something like 15%, Oxford Economics suggests.

Over the next 10 years, the emerging economies are expected to at least double their share of world output. 

Chemicals production in 2007 - index growth over 2006*

 

June

July

Aug

Sept

Oct

World total

5.1

4.4

3.8

3.1

 

North America

0

0.1

-0.2

-0.4

0

Latin America

2.8

2.3

1.9

1.3

 

Western Europe

3

1.5

0.2

-1.1

 

Central & eastern Europe

9.7

8

7.2

5.9

 

Africa & Middle East

4.8

3.7

3.8

3.9

 

Asia-Pacific

10.4

9.9

9.5

8.8

 

* excludes pharmaceuticals; three month moving average
Source ACC


By: Nigel Davis
+44 20 8652 3214



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