28 December 2007 16:17 [Source: ICIS news]
By Nigel Davis
LONDON (ICIS news)--Reading the ICIS news 2008 Outlook stories published over the past few days it would seem that chemical producers are confident of a strong start to the year but have reservations about the second half.
That is the case if you look at the industry largely from the supply side.
The impact of the long awaited rush of new capacity is expected to be felt from the second half of next year.
Companies have been preparing for this capacity wave for a long time, but other factors are working away to raise uncertainty across the sector and not just in the ethylene chain.
The industry has basked in the light of strong demand and tight supply and companies have dealt with the real problems of sky-rocketing feedstock and energy costs.
A buoyant M&A (merger and acquisition) market has helped along a much needed bout of portfolio realignment.
At some stage, however the frenetic pace of business activity in chemicals will have to slow.
And it is this slowdown – on the demand side and on the transaction front – that will make the chemicals world a more difficult place in which to do business.
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Recent economic reports mostly have been negative. Consumer spending, however, has remained a bright spot.
Regional surveys have indicated that manufacturing slowed in December and the outlook is not positive.
Of some concern has to be the fact that activity was flat in western Europe.
As they stand, then, the statistics are not clearly pointing down and some encouragement must be had for the apparent robustness of chemicals activity globally.
But analysts and others have raised doubts about continued demand strength.
The upstream producers are exposed, but so are companies active in important markets including construction, clothing, footwear, automotive and electronics.
Credit Suisse, for instance, said last week in a note to clients that its global GDP (growth domestic product) forecasts had been downgraded by 30 basis points with expectations lowered in all three key regions: the US, Europe and Asia excluding Japan.
Slower economic growth will go some way to reduce the strong sales growth seen in the sector in recent years, its
The unweighted average growth in revenue over the past decade has tended to lag six to 12 months behind the US GDP trend, the bank added.
A one percentage point shift in US GDP growth has equated to a 2% average shift in revenue growth over the same period, although the multiplier in some years has been significantly greater than this.
Lower sales growth will dampen cash generation and put some companies on their mettle as credit burdens increase.
At the same time, those that have moved effectively to re-orient portfolios could find themselves in a much stronger relative position.
Couple the less ready availability of cash with the squeeze on credit and the exit from the M&A market of private equity funds and the potential sector slowdown looks almost complete.
Companies will still have to battle costs – and analysts are talking on Friday of $100 a barrel oil being breached in the near term. In 2008, they will just have a much more difficult time doing so.
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