INSIGHT: Green shoots evident but outlook still hazy

01 September 2009 15:46  [Source: ICIS news]

By Lucy Craymer

LONDON (ICIS news)--Again absent from most chemical companies' recent quarterly results were firm outlooks, which would have given investors and analysts a guide to what is in store for the rest of 2009.

When queried on this, CEOs responded from the same script – they remained unsure of what was in front of them.

While 'green shoots' have been hailed globally as large economies Germany, France and Japan move into GDP growth, the more pessimistic (or perhaps more realistic) chemical economists have greeted this news half-heartedly.

For starters they have warned that even once a recession is 'officially' over, history has shown that it takes several years for industry - including those in chemicals - to feel this recovery.

Furthermore, they have argued that recent demand is due to the end of an extended period of destocking and that growth is due to government initiatives such as new-car subsidies rather than genuine desire.

According to Germany’s auto association VDA, new car registrations in July were up 3% at 1.3 million but remained down 9% for the January to July period year on year.

With much of the new demand being spurred by government subsidy schemes, those providing feedstocks for the industry are unsure what will happen when the schemes end.

In the engineering plastics sector demand has firmed and prices have remained stable, but still end users are reluctant to rebuild inventory levels because of their uncertainty on the outlook of demand from the end-user market.

Yet titanium dioxide (TiO2), which is considered by many to be a barometer for economic recovery due to paints and automotive coatings being end users, has seen marginal price hikes of €20/tonnes ($29/tonne) in recent weeks, indicating that the economy could be heading towards recovery.

However, even if TiO2 prices are an indication of improvement in the construction sector, statistics indicate something different. Seasonally adjusted production decreased by 3.3% in the EU27 in June 2009 compared with the previous month, according to statistics released by the European Commission's statistics department, Eurostat.

And with much of the economic data continuing to show negative trends, investment bank JP Morgan has attributed many of the better-than-forecast second-quarter results to improved operating rates as company-level destocking reached an end.

“However, as customer destocking slows and sales volumes start to increase we expect operating rates (and therefore margins) to show an even greater improvement over the remainder of 2009,” it added in a report on chemical companies.

But even with restocking and increased operating results, Cefic’s most recent Chemical Trends Report placed output in the EU chemical industry (excluding pharmaceuticals) down 16.7% in May year on year.

More telling is the fact that output in May was back at a level not seen since May 1997.

This begs the questions – how long will it take for demand to recover and will it ever be the same again?

The chemical sector is propelled by the wants of consumers and their desire for up-to-date, top-of-the-line gismos. But with tighter credit and a new understanding by consumers of the downside to unlimited credit, there is a possibility that demand post-recession will be forever changed from that of 18 months ago.

And the general consensus from European chemical heads was no major upturn had been seen yet.

“Capacity utilisation from below 60% in the first quarter to slightly above 60% in the second – there was no reason why the second half would show an improvement on the first and could be possibly worse,” said BASF CFO Kurt Bock.

Even Borealis, which should start to feel the benefits of the its presence in low-cost polymers production in the Middle East, does not expect an upturn within the next 18 months.

However, even if the upturn is slow and demand and output remain low in the third and fourth quarters, results are going to look better year on year in light of the fact that they are being compared with those of 2008 when the global downturn was affecting bottom lines.

($1 = €0.70)

Read Paul Hodges’ Chemicals and the Economy Blog
To discuss issues facing the chemical industry visit ICIS connect

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By: Lucy Craymer
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