INSIGHT: Credit crunch heralds deeper slowdown

14 March 2008 14:57  [Source: ICIS news]

LONDON (ICIS news)--Producers for years have expressed concern about the mountain of olefins and polyolefins capacity that could destabilise the global petrochemicals business. Their attention now has to be turned to the enveloping global credit crisis.

Record feedstock and commodity prices, a seriously weakened US dollar, the slowed US economy and subsequent stock price volatility all point to very difficult times ahead.

A few weeks ago the credit crunch was not so much being passed off as being played down.

Not a great deal has changed on the industry front and there are few signs other than in specific market segments of a downturn.

Yet the odds are stacking higher against the industry.

Producers stick to their guns when they look at supply and demand. They generally know what plants are due on-stream where; the wild card continues to be Iran.

But it is the prospect for considerably slowed demand growth that should raise most concerns.

The global credit crisis has acquired nightmarish proportions. Sharp adjustments to capital flows are by no means played out.

The knock-on effect on consumer demand in the US has been obvious. The questions are whether the US potentially faces  “a lost decade of growth” and how consumption will be affected in other powerhouse economies, most notably fast growing China.

For the chemicals sector there have already been stark warnings of a sharp slowdown in China demand. Couple that with the badly affected US construction sector; poorly performing automobiles; and slower growth in Europe and the year begins to look increasingly difficult.

Industry players know they are in for challenging times. The question now is just how challenging.

China demand has only to come off a few percentage points for the affect to be felt. Chemical markets can be as volatile and unpredictable as any other and a few tonnes here or there can tip the balance.

Quite rightly industry executives are most concerned about volatility, and they are being dealt that in spades.

Producers in certain regions, Europe included, can hang on in a relativity low growth environment. They have considerable momentum behind them. But volatility in raw materials, energy and currency markets hit them hard. Pricing becomes extremely difficult and margins are squeezed.

Again there is little direct evidence across the sector of a severe demand slowdown or of severe margin erosion. But the outlook is clouded to say the least.

In the coming few months it will be the producers who have bedded in the right assets in the right markets who will fare best. The stronger the balance sheet the better.

Companies should have used the past few very good years to build defences in fixed asset, financial and technology terms.

The mountain of new polyolefins capacity looming on the horizon then is less daunting. The slowdown, however, from an industry point of view looks increasingly scary.

By: Nigel Davis
+44 20 8652 3214

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