INSIGHT: With few signs of restocking, 2009 looks difficult

14 January 2009 17:29  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Business confidence is low and demand is weak. The two run hand in hand, and the chemicals sector has been hit hard. 

Last week, the EU’s business climate indicator (BCI) for the euro area took another turn for the worse to reach an all-time low. It now looks as though industrial production growth will have been clearly negative in the fourth quarter.

All five underlying components of the BCI deteriorated, the European Commission said on 7 January.

“Managers reported a sharp fall in the production trend observed in recent months while stocks of finished goods increased. Their assessment of the current overall order books and export order books is increasingly negative. Looking ahead, production expectations in the euro area worsened notably compared to last month and are now at their lowest level since 1985,” it added

And the chemicals markets are as depressed as any - as anyone with direct contact with them knows only too well. Production plants remain offline or are running at reduced rates. There has seemed to be little life in the beast in the first days of 2009.

December was a bad month for chemicals players in Europe. January is not looking much better. It is difficult if nigh on impossible to talk yet of recovery, although it must surely come in one form or another.

The extent of the downturn, however, is beginning to take its toll. Permanent plant closures are being announced now. These older units, with a not fantastic place in the market, and those employing old technology are the first to go. No producer yet, thankfully, has been forced to mothball or close a “viable” facility.

Looking across the business in Europe in the first 10 days or so of January, there were few signs of optimism. Many of Europe’s crackers were offline and freezing weather was not helping. Olefins output was widely reported to be still very much reduced in the aftermath of a considerable downturn in derivatives demand in the fourth quarter of 2009, according ICIS pricing.

Some start-ups were ongoing, however, and there was talk of slightly improved rates at certain crackers. Activity, nevertheless, remained at a low level. Market players also were tending to look at prices on a monthly, rather than quarterly basis, after being caught out badly in the latter part of last year. That by no means signals the full adoption of a monthly pricing mechanism for olefins in Europe, but it gives further momentum to the monthly settlement process.

The current situation has been exacerbated by the weaker oil price, which has pulled away yet more support for higher chemical prices. Getting those prices back up will be a difficult task given the extent of the slump.

The aromatics markets are depressed and prices low with little stimulus for demand. Downstream from the major aromatics, however, there are some positive stirrings and certainly a feeling that market conditions are better.

This, however, is comparing January with December which, by all accounts, was a dire month. If markets are driven by mood, which they surely are, then January looks better for polyethylene but not for polypropylene, where the spectre of new capacities weighs heavily on demand. There is some sense that prices for polyethylene terephthalate have bottomed out with pre-buying in the bottle sector.

There is talk elsewhere of restocking, but the sense still that inventories will stay low as producers and consumer live “hand to mouth”. That situation will persist until there is evidence of downstream strength. Unfortunately, given the macroeconomic news and the sectoral facts, such evidence may not be apparent for some time.

The first quarter should be relatively strong for chemicals as consuming industries gain momentum, but this year it is particularly weak. Producers may hope for a better second quarter but visibility is poor to say the least, and the economic prognoses are not good. At best, Europe's chemicals players face a difficult 2009.

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By: Nigel Davis
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