Construction downturn hits BPA and polycarbonate hard

Growth expected for 2010

03 March 2009 11:17  [Source: ICB]

Europe's construction chemical markets have been hit hard by the economic slowdown. But huge amounts of state spending on stimulus packages, and growth in unconventional markets, means the outlook is not completely bleak

ACROSS EUROPE, the slowdown in the construction industry has been evident since the second half of 2008. In the UK, government figures show that almost 50,000 construction jobs were lost during this period, and both the European polycarbonate (PC) and bisphenol A (BPA) markets have seen demand plummet as funding for new construction projects comes to a halt.

However, the gravity of the situation varies across different European markets. While housing, civil engineering and commercial construction in the UK saw record declines in activity by December, the construction industry in Germany has so far proven to be remarkably buoyant.

One reason for this is that the order books for the construction industry in Germany are already filled for the first half of 2009. Ongoing large scale projects that were commissioned in mid-2008 have ensured that there has been no dramatic slump in orders as seen in the manufacturing sector. In response to the wider economic downturn, a German government stimulus package has earmarked €18bn for investment in the construction industry over the next two years to be used in infrastructure initiatives, which has also helped firm up the sector.

"The construction industry is fairly solid," says one BPA trader. "Although the media has painted a rather negative picture, the mood is actually not that bad. The government package for some is like the light at the end of the tunnel."

However, a steady decline in orders had been observed across the German construction industry toward the end of 2008, and many in the market believe that the downturn that has plagued other industries will only be felt in the second half of the year.

"There is that time delay element for ongoing construction projects," says a PC producer. "Building has started already, so there is a need for the materials. But things could slow down significantly by the third quarter of 2009."

POLYCARBONATE OUTLOOK

Market participants remain sanguine about construction industry demand for PC, believing that the downturn in consumer spending on appliances and the continued slump in the automotive industry are far more pressing.

One reason for this is that winter has traditionally seen a tailing off of activity in the construction sector due to the weather. Several sources point out that Europe has had a particularly cold 2008/2009 winter, and believe the slowdown in orders for both PC and BPA is largely seasonal.

Should the drop in sales to the construction industry deepen as the year unfolds, the PC market is perhaps better suited than BPA's market to find alternatives downstream, as it has a wider remit in terms of applications.

There remain markets, albeit niche ones such as medical supplies, that have weathered the downturn with little to no discernable effect. But these markets are minuscule in terms of overall volume. For an alternative market sector to be sustainable, it will need to be able to absorb the quantity of material that the construction industry traditionally consumes.

RENOVATION TO THE RESCUE

One PC producer comments that they had seen an upturn in orders for molding-grade material from the electronics and electrical sector for electric sockets and switches, adding that this could become a wider trend.

"We have seen the reduced demand this year from the slowdown in building projects being compensated for by an increase in renovation work," says the producer. "Either way, it works for us."

Nevertheless, the producer tempers this optimism with a note of caution, saying that it is still too early in the year to determine what the likely fallout from a sustained slump in the construction industry would be.

"After the first quarter, the picture will be clearer in terms of demand," he adds. "Overall, there has been a reduction in demand and some downward pressure on prices, and we will most likely see some price decreases."

BISPHENOL A

While the BPA market is now showing initial signs of stability after plummeting toward the end of 2008, it has undoubtedly suffered from the drop in construction industry activity. The main market for BPA is in the production of PC, which has slowed down since Q4 2008, while the other key application is in the epoxy resins sector, which has taken a huge hit in sales with the slump in the automotive industry.

According to one trader, the foremost driver of BPA and epoxy resin sales in 2008 was the shipping sector, as it is used to coat cargo containers. The wider downturn in global commerce that the current economic challenges have fostered will make it difficult for BPA to maintain sales volumes.

"The older, well-known applications for BPA are still down, and there are not really any substantial alternative sectors," says the trader. "General demand has to pick up for the market to recover."

THE ANSWER IS BLOWING IN THE WIND

In terms of alternative downstream markets for BPA, several players mention the burgeoning green and wind power sectors. One distinct advantage that this area has is that in many European countries, these initiatives are backed with government funding, keeping demand stable.

Globally, wind power has grown over the last five years from virtually zero to an industry that now takes 80,000 tonnes of epoxy resins per annum. While demand in Europe for this sector is currently stable, in North America and other regions it continues to grow apace.

Nevertheless, this remains merely a fraction of the overall BPA volume that the construction industry currently accounts for, and some in the market believe that the wind power sector in Europe may in fact be declining. One BPA buyer believes that the situation will get worse before it gets any better, stating that they expect to see more layoffs and production cutbacks in 2009.

"The problem is not just with the automotive industry, although that is the most visible sign of the current slowdown. It is bad across the board in all downstream sectors," said the buyer, adding that the current oversupply in the market could only be solved with production shutdowns.

Other market players are slightly more confident that demand will bounce back later in the year. According to several BPA suppliers, the demand for epoxy resins in 2009, while undoubtedly down from the previous year, is not yet sounding alarm bells.

"The market is pretty weak at the moment, but we expect it to get better towards the end of March, which is when the construction industry sees its peak in activity," says one epoxy resins producer, who fells the current slowdown in Europe remains a largely seasonal issue.

The stabilization of upstream material prices in January may help boost epoxy resin sales now that suppliers will be able to offer material at competitive prices, according to one source. Similarly, one trader said that it could be a good time to buy BPA at a competitive price before the market begins to claw back some of the values lost since last year.

However, whether this optimism will be matched by an improved demand from downstream markets remains to be seen. Both buyers and sellers are uncertain of how the wider economic situation will develop in 2009, and the effects this will have on the industry.

Truong Mellor covers BPA, PC, xylenes, toluene, butanediol and engineering plastics for ICIS pricing.

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By: Truong Mellor
+44 208 652 3214



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