OUTLOOK '08: EU chems growth set to weaken

03 January 2008 16:29  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Europe’s chemicals producers look set for a tricky if not difficult 2008, even though they might expect to ease into the new year.

The sector has yet to show signs of a slowdown but industry economists are suggesting that regional demand growth will slow in 2008.

The knock-on effect of the global credit crunch is likely to be felt in vitally important consumer markets. Business confidence in Europe’s services sector and in construction has already weakened.

The year is likely to be characterised by tougher times in domestic European markets but still strong chemicals demand growth in many parts of the world.

The impact of the slowdown will vary from company to company but will expose those who are still in the process of shifting portfolios and introducing operating efficiencies.

Chemical producers had a good if not exceptional 2007 driven by strong demand growth, supply tightness and, particularly upstream, higher prices.

Some speciality producers had a tougher time of it as they faced increased international competition, higher raw material costs and a difficult pricing environment.

The industry generally has been hit by high oil and naphtha feedstock costs and the weakness of the US dollar.

It has been buoyed, however, by strong domestic chemicals demand growth and strong demand growth in increasingly important markets in China and other emerging economies.

The threat of a widespread economic slowdown and higher oil prices hang over the sector. The industry can hope for a soft landing for the global economy although that may translate into tougher business conditions at local national levels.

Economists expect central bankers to do their bit to avoid a full blown recession. But fallout from the credit crunch has led to growth downgrades.

Credit Suisse late last month, for instance, downgraded its global GDP forecasts by some 30 basis points with expectations lowered in the three key regions of the US, Europe and Asia excluding Japan.

Slower growth will help reduce sales growth in chemicals, the bank’s equity analysts say.

The (un-weighted) average growth in revenue over the past decade has tended to exhibit a lag of six-to-12 months relative to the trend in US GDP movements, they add.

“Adjusting for this lag, a one point shift in US GDP growth has equated to a 2% average shift in revenue growth over the past decade, although the multiplier in individual years has been significantly in excess of this.”

In its most recent industry forecast, finalised in early November 2007, trade group Cefic suggested that output growth in 2008 would be around 1.9% in 2008, down from the 2.6% expected fro 2007 as a whole.

“The 2007 growth figure lies above the average growth rate over the last five years, which is due in part to recovery from technical problems in several petrochemical installations in 2006,” it said.

Output growth of 2.3% was expected in 2008 for the EU chemical industry as a whole, including pharmaceuticals, down from 3% in 2007.

A growth rate decline in 2008 would be caused by the dampening effects already existing in 2007, but materialising only with some months’ delay, and a general cooling down of the world economy, the trade group added, echoing the opinion of most commentators.

The poorer outlook was highlighted by generally lower levels of business confidence across the sector.

Chemicals business confidence weakened in the later part of 2007. The December indicators are not out yet but are likely to show a decline.

The Ifo Business Climate Index for industry and trade in Germany, Europe’s largest market for chemicals, fell further in December after a brief flight upwards in November. The ratings may be down but were still clearly above below the long-term average.

Ifo said the outlook for the coming six months “continues to be assessed cautiously” but had weakened and that the cyclical dynamics were weakening.

By: Nigel Davis
+44 20 8652 3214

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