Lehman Brothers fall sparks fears for Europe chems

16 September 2008 12:40  [Source: ICIS news]

By Hilde Ovrebekk

LONDON (ICIS news)--The fall of US investment bank Lehman Brothers triggered fears of a lengthy downturn in the European chemicals sector on Tuesday with players seeing a possible weakening in demand and future cuts in capital expenditure.

“We have been feeling the impact all year, things will just get worse,” said a nylon buyer.

“Falling crude is good for raw materials but energy costs are still high and labour costs are not coming down,” the buyer added.

As crude falls, demand from downstream producers may be reduced in anticipation of a further fall in raw material prices.

Another possible longer-term effect would be a cut in capital expenditure as companies fail to get the funding needed to build new facilities and upgrade plants.

An epichlorohydrin (ECH) and epoxy producer said: “I think we’ll have to wait and see the implications of this on the industry.

“Certainly, new plants that have been commissioned two, three years ago and are due on stream now will continue to go ahead, but we might feel the shortfall of a lack of investment in a few years, which might even hinder a recovery,” the source added.

Chemical companies should be prepared for a downturn even though it might not materialise, said Paul Hodges of International eChem on Monday.

“We need to start planning for this,” Hodges said. “Banks will be trying to cut back loans just as companies have high working capital.”

Commenting on the UK market, equity analysts at Credit Suisse said they did not believe the latest developments in the US market were going to help the availability of credit.

“We continue to worry about asset prices, and in turn impairment risk and pro-cyclicality risk in the UK market,” the analysts said, adding that the main concern would be cost.

"Rising funding costs might also pare any asset driven margin improvements into next year."

London-based bank HSBC said earlier this month that Europe's largest economy Germany may be in a technical recession after data from the federal Economic Ministry showed the country's industrial production fell 1.8% in July.

Last week, the European Commission cut its growth forecasts for Europe for 2008, as it said the effects of the US-led downturn was hitting much harder than previously expected.

The Commission, which also predicted brief recessions in Germany, Spain and the UK, raised its forecasts for inflation at the same time as it lowered them for growth in the 15-country eurozone and 27-member EU.

GDP growth predictions were cut to 1.3% from 1.7% for the eurozone after GDP shrank in the eurozone in the April-June period for the first time since the currency bloc was created in 1999.

The global financial crisis in the US deepened over the weekend with the collapse into Chapter 11 protection on Sunday of  158-year-old Lehman Brothers and the $50bn (€35bn) acquisition by Bank of America of Merrill Lynch.

US insurance giant American International Group (AIG) may also be forced into filing for bankruptcy if it cannot secure sufficient fresh funding by Wednesday, the Wall Street Journal reported on Tuesday.

Three main credit rating agencies - Standard & Poor's, Moody's and Fitch - lowered AIG's credit ratings on Monday, prompting a need for the insurer to raise more capital to survive. The company’s shares plummeted 61% on Monday to $4.76.

European stocks continued to fall on Tuesday, with a number of chemicals companies seeing their shares fall. The FTSEurofirst index of leading European shares was down 1.2% at 1,106.09 points, following a 3.6% drop on Monday.

These recent events followed the $3,000bn federal bail-out last week of US mortgage lenders Fannie Mae and Freddie Mac.

($1 = €0.70)

Julia Meehan and Stephanie Wilson contributed to this article
Bookmark Paul Hodges' Chemicals and the Economy blog
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By: Hilde Ovrebekk
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