19 September 2008 17:12 [Source: ICIS news]
By Nigel Davis
LONDON (ICIS news)--Towards the end of an extraordinary week some confidence has returned to the world’s financial markets while manufacturing industry still has to take stock.
At the time of writing the ?xml:namespace>
It was expected to take on billions of dollars worth of mortgage-related debt, the toxic loans that are the root cause of this unprecedented financial collapse.
Inter-bank lending is all but frozen and the future of once strong financial institutions still under threat.
Markets reacted positively to news of the
But the recent turmoil will not easily be left behind.
The knock-on effect on companies and markets could in itself be unprecedented.
Manufacturing industry is heading for a steeper than expected slowdown and chemicals growth is expected to stall. There is continuing high risk of a major economic downturn.
Weaker demand is already having an impact on important polymer and other chemicals markets in North America and
Projections of sector output have been lowered substantially since the start of the year based on the spreading slowdown and fears of recession in western economies.
This banking sector turmoil, however, could dent the decoupling theory which suggests that the fast growing economies in
Of vital importance for chemical makers is the health of demand from
The balance then between
Slowing demand growth began to take its toll in the second quarter: the American Chemistry Council’s global chemicals production index (for chemicals excluding pharmaceuticals) fell from 9.5 to 6.1 between April and June.
Chemicals growth in North America and Western Europe has slowed markedly and the statistics are showing demand growth under pressure in
"We were riding on the astronomical growth of
The chemicals world needs continued strong demand growth from
Without that demand growth, product will back up into markets in Europe,
Some firms are more vulnerable than others. The coming downturn will test production and operating efficiencies and, indeed, the balance sheets of some.
Turmoil in the financial markets could temporarily disrupt merger and acquisition (M&A) activity and add risk to existing deals, Scott Anderson, senior economist with US financial services company Wells Fargo, said on Thursday.
But on the other hand, the disruption to credit markets could help generate more interest in consolidation.
At the ICIS Chemical Purchasing summit in Boston, Massachussets, this week, Laurence Alexander, an analyst with the investment bank Jeffries, said: “The main question is whether the credit market dislocations will have an impact on credit availability next year, and how sensitive the market will be to balance sheet ratios.
"It’s possible the market may penalise companies for having high debt levels."
You are fine if you can continue to service debt, but physical market dynamics suggest that cashflows are likely to diminish over the coming quarters. Woe betide any chemical producer in need of refinancing over the next six months.
Chemical companies have come rapidly off a plateau of performance still manifest in 2007 but clearly weakened in the first half of 2008.
How that performance might be affected by the storms raging in the financial markets may not be clear but the prognosis is not good.
“The credit crisis is like an uncontrollable forest fire, with the potential damage to the
The financial market turmoil threatens chemical companies worldwide as well as the markets they serve.?xml:namespace>
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