OUTLOOK '09: German chems face tough year in falling economy

05 January 2009 13:14  [Source: ICIS news]

By Hilde Ovrebekk

LONDON (ICIS news)--With the German economy expected to drop in 2009 and exports falling sharply, the country’s chemicals industry is facing a tough year ahead.

Germany's Ifo economic research institute forecast a slump in the economy of 2.2% and a further decline of 0.2% in 2010, while its central bank, the Bundesbank, expected a 0.8% decline. The country's business confidence is at a 26-year low, according to Ifo.

The German economy is heavily reliant on exports, and these have fallen sharply since the second quarter of 2008.

Particularly affected is the automotive industry, which has declined dramatically in the past couple of months both in Europe and the US.

German chemicals association VCI expects the country’s chemicals production to drop by 1% for 2009 after four years of growth. Excluding the pharmaceuticals sector, the chemicals industry was expected to shrink by 2.5% this year.

“The falling demand from industrial customers – and in particular from the automotive and construction industries – as well as the reserved consumption behaviour of private consumers make themselves felt strongly,” said Ulrich Lehner, president of VCI.

ACEA, the European manufacturers' trade body, recently said sales had declined for seven months in a row in November - the first time they have declined at that rate in almost 10 years.

Overall sales were down 7.1% for the first 11 months of 2008, with 1m fewer cars sold in western Europe than the previous year.

Standard and Poor’s credit analyst Tobias Mock said the visibility in the chemicals industry was lower in 2008 than in previous years and that it was difficult to predict the severity of the crisis.

The majority of chemicals companies in the country are expected to show inventory writedowns as a result of the rapid deterioration in raw material prices.

Although this price fall, combined with the strengthening dollar, will be supportive for the export-oriented chemicals industry as it will provide relief to working capital in the medium term, the impact of this will take some time to flow through the value chain.

It is hard to say how significant the decline would be, Mock said, adding that one of the questions was for how long automotive production would be idled.

The country’s furniture and wood-processing companies are also suffering, as a result of a decline on the US housing market.

The problem for Germany, and a number of other countries which rely on exports is that this time every country was suffering and this would have a wider effect than normal, said Mock.

The German government held an economic summit meeting mid-December at which it said it had agreed with employers to a voluntary no-firing policy as part of efforts to pull out the country out of recession.

However, a number of companies, including chemicals producers, have already taken measures to ensure they can get through the tough times ahead.

BASF cut production at 80 plants worldwide and reduced capacity at a further 100 facilities, affecting 20,000 jobs. German potash producer Kali and Saltz (K+S) has said it would extend production cuts into 2009, and LANXESS has cut production at 23 of its 45 German plants.

A number of companies have introduced short-time working in a effort to maintain their employees, but analysts said it would be difficult for companies to give blanket commitments to saving jobs when they did not know what the government intended to do in the near future.

“With a package of measures, our member companies are preparing themselves for the recession,” said VCI's Lehner.

“They are doing what they can to keep permanent staff. We very much hope that they can hold out until we have passed through the trough and the demand picks up again,” he added.

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By: Hilde Ovrebekk
+44 20 8652 3214

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