INSIGHT: Chems limping along with the economy

20 June 2008 16:52  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The housing downturn and the credit crunch have hit the US chemicals sector hard, forcing production cutbacks and threatening the viability of some deals and, indeed, businesses.

But the extent of the downturn is only now becoming widely apparent and starting to reverberate around the sector.

Coupled with a sharply higher cost environment, the industry has been pushed rapidly into difficult times and, for some smaller businesses at least, to the brink.

It was clear by the end of last year that 2008 was going to be difficult, the second half particularly so. Yet growth forecasts remained relatively bright.

The latest analysis, though, makes salutary reading.

Chemical industry economists met in Brussels last week to pore over the regional and global data and update projections. The first fruits of that analysis paint a picture based on the continued economic slowdown in the US and the widening impact of the credit crunch.

The latest forecasts from the American Chemistry Council (ACC) suggest that US chemicals production output volumes will shrink this year by 0.6%, having only grown by 0.2% in 2007.

This slowdown of production is expected to be broad based, with plastics and petrochemicals output contracting alongside that of specialties and agricultural chemicals.

From the current standpoint, the decline in volumes does not look as though it will be as bad as in 2001, but then the data will be open to revision as more "actual" numbers become available.

Across the sector the direct affect of higher feedstock and energy prices coupled with the, usually indirect, impact of the credit crunch is constraining business activity.

Companies are seeing customer activity constrained by prices and credit availability. Any businesses linked to construction, such as some plastics, specialities and coatings, have been hit hard .by the housing downturn.

Tightening lines of credit are causing problems for plastics processors, which are finding it increasingly difficult to raise funds to purchase plastics resin.

Weakened profitability, the poor outlook and the increased difficulty in securing credit look as though they will scupper one of the sector’s biggest deals forged in 2007 between specialties maker Hexion and Huntsman.

Polymer makers will be hit by weakened demand but currently see something of a demand upturn according to recent Deutsche Bank research which suggests that there is pre-buying ahead of expected price increases and the hurricane season.

Pricing power remains cemented upstream with ethylene and polyethylene makers passing on cost increases.

Railcar loadings which are usually a robust indicator of chemical industry activity, are up 3.2% in the year todate.

These have, however, been tracking US Department of Energy ethanol blending data and, as Deutsche bank points out, suggest that increased ethanol use in fuel is boosting the chemicals numbers.

On the positive side, retail sales for May have come in much stronger than expected and the bank’s US economics team expects that increased consumer spending could push second-quarter US GDP growth to a rate between 0.5% and 1.0% compared with an earlier -0.8% forecast.

The sector can expect to continue to battle against weaker demand, however, and the impact of high raw material and energy costs.

Rising costs have increased the pricing power of ethylene chain chemicals makers and export volumes are said to be improving, driven by demand from Asia and South America which is offsetting seasonally weaker demand from Europe.

Feedstock ethane prices surged in June but to a lesser extent than naphtha.

Citigroup on 13 June reported that the cost of ethylene production using ethane was $0.47/lb - about $0.65/lb below the next cheapest feedstock, propane, and $0.30/lb cheaper than light naphtha.

Many producers have responded to the pressure of increased costs by announcing across-the-board price increases. The extent to which these increases can be made to stick will depend heavily on the way in which demand holds up throughout the chemicals economy.

The chemicals downturn in the US is real and significant.

The ACC said last week that polyvinyl chloride (PVC) production was down 10% year on year and almost 6% in the year-to-date in April.

Sales and captive use were both lower. Polystyrene supply was even more sharply curtailed. Both products find widespread use in construction.

The US economy now, however, is hobbled not simply by the construction downturn and the credit crunch but by higher oil, energy and food prices. In the words of a private business group on Thursday, it is limping along.

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By: Nigel Davis
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