INSIGHT: Gathering signs of recovery for chems

11 March 2009 17:25  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The economic outlook is grim and bad news proliferates but there are signs in March that the chemicals business is beginning to pick up.

This is not a return to growth for the sector but a return to something approaching normality. Oil prices have stabilised, well down from 2008 highs, and there is some positive movement on chemicals stocks.

The collapse in demand in November last year was only the beginning of a deep slump. December was bad for most players, January and February probably worse.

The data show that chemicals output, excluding the benign influence of pharmaceuticals, dropped 13% year on year in Europe in the fourth quarter. Up until the end of September output was down just 0.1%.

The very real problem with this recession is that it has spread across the globe. Chemicals producers have not only seen demand slump in domestic markets, export levels have been decimated too.

Not surprisingly the output of basic chemicals has been hardest hit, the fall in output in this segment a whopping 18% in Europe in the fourth quarter. That is a steeper fall than the 11% drop registered in the second quarter of 1980. EU petrochemicals output was down 17% in the fourth quarter of 2008 and polymers down 18%.

The latest crop of financial results has shown the calamitous impact of the slump. First quarter 2009 numbers are not likely to be much better. But there are signs that a degree of re-stocking has begun, prices are picking up and, some say, demand is returning.

The inventory run-down by chemical industry customers in the fourth quarter of last year was particularly severe. But now, three months on, some in the industry see an end to the inventory cycle.

In a European Parliament briefing paper on the crisis, for instance, Henrik Meinke, writing on behalf of the European Chemical Marketing and Strategy Association (ECMSA), suggests that the situation might improve in the coming months.

“This is not a sign of an overall recovery,” he warns, “but some kind of ‘normalisation’ within the downward trend”.

Meinke works for Germany’s VCI and that association has just revised downwards its forecasts for the country's chemicals output (excluding pharmaceuticals) in 2009 to a fall of between 5% and 6%Europe’s chemicals output, excluding pharmaceuticals, is expected to shrink by 6% this year.

First signs of recovery then do not mean that times are suddenly going to get better for chemicals players. That is the health warning. They do suggest, however, that companies can be more confident in the measures they have in place - or are about to implement - to increase efficiencies and preserve cash.

Petrochemicals prices do appear to be bottoming out and there has been some upward movement in February, driven mainly by the stabilised oil price and the stronger US dollar.

Demand for chemicals is expected to increase, Meinke suggests, as downstream customers realise that it may not make sense to speculate further on lower prices for base chemicals.

Industry players also reckon that government stimulus packages will eventually help, although the uplift from them may take some time coming.

In the more immediate term, chemicals plant closures will have helped keep inventories low. As re-stocking begins, announcements of a return to more normal production levels might be expected. “This should give the markets further confidence for future planning,” Meinke says.

He qualifies that statement, however, by acknowledging that activity is likely to be “at a substantially lower level [than in the not too distant past]”.

What has yet, perhaps, not been fully factored into people’s thinking is that time will be needed to overcome this crisis. Although by far not the hardest hit industrial sector, chemicals will take time to recover.

The industry’s forecast for declining growth this year already include a ‘normalisation’ of chemicals demand in the second quarter. But a global recovery should not be expected before 2011, Meinke says.

This means that 2009 and 2010 will remain difficult for European chemicals.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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