'Worrying outlook' for commodities in 2008 - Citi

11 January 2008 13:05  [Source: ICIS news]

LONDON (ICIS news)--Weak US demand, high oil prices and the onslaught of Middle East capacity in the second half of 2008 will affect shares in commodity chemicals producers, Citigroup said in a report released to the media on Friday.

 

“There is sufficient Saudi Arabian and Kuwaiti capacity coming on stream in the second half to drive global ethylene margins down sharply by year-end,” the bank's analysts said.

 

Between 2006 and 2011, 39m/tonnes of C2 capacity will be added across the globe.

 

Analysts said that the corresponding increase in propylene production, with two propane dehydrogenation plants due on schedule in the first half of 2008, could also cause an oversupply of C3, which could lead to overcapacity in the ethylene chain.

 

Increased cheap polyethylene terephthalate (PET) capacity is also due to come on stream over the next two years and squeeze margins, the report said.

 

“The outlook for styrene and polystyrene producers remains bleak, with roughly 10% of incremental global capacity coming on stream in the next two years,” it added.

 

While Belgium-based Solvay said Europe's polyvinyl chloride (PVC) markets will remain tight despite the US slowdown, the bank's forecasts were far more cautious.

 

"Much will depend on 2008 European construction activity development,” the report added. 

 

The chemicals sector has outperformed the rest of the markets in the last 30 days due primarily to the strong performance of agricultural stock and overall 2007 was a better-than-expected year, the analysts said.

 

The Dow Jones Chemical EuroStoxx increased by more than 4% in the last 30 days while the Dow Jones EuroStoxx was down over 6% over the same period, the analysts said.

 

“Wacker [Chemie] was the underperformer last month, with investors taking profits following the stellar share price performance in 2007,” it added.

 

UK polymer producer Victrex, agricultural chemical company Israel Chemical (ICL) and chemical company Bayer were the top performers, with their stocks each rising more than 10%.

 

The company has buy ratings for agricultural companies such as Monsanto and ICL, environmental players such as Wacker and Johnson Matthey and "defensive" names such as Linde, Air Products, Praxair, Givaudan, Symrise, Ecolab and Nalco.

By: Lucy Craymer
+44 20 8652 3214

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