INSIGHT: End-of-quarter lull has all on edge

28 September 2009 17:52  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--It still comes down to the rate at which demand is picking up.

Chemicals producers are in a difficult place at the end of the third quarter. China has sucked in product to help the world look a much brighter place. The economic data show some of the world’s major economies emerging from recession.

But small companies in the west at least continue to find the going particularly hard. The banks have not yet eased lending restrictions sufficiently to give any small-to-medium sized operators much of a sense of security – or support.

Demand has been lifted by the stimulus packages introduced by governments worldwide, that much is clear. No one is clear, though, on what happens next.

China's markets are skewed now by the upcoming week-long holiday associated with the country's National Day on 1 October.

Chemicals prices have drifted lower, seeming to lose the impetus that has kept them buoyed, pushed higher by demand as well as the stronger oil price for the past seven months.

Demand in China has drawn in imports and helped underpin some businesses in Europe and the US. The month-on-month gains in output in some segments of the industry illustrate that.

But everyone now appears to be waiting for what happens to the China-led demand after the holiday period.

Demand for polyethylene and polypropylene from Europe, for instance, has been driven to a large extent by China for much of this year.

European buyers came back into the market after the summer holiday period, resulting in a mini-phase of panic buying. But the markets have gone extremely quiet in the second half of September.

Buyers do no seem greatly concerned with moving feedstock prices but their actions, rather, reflect the fact that regional European demand is so poor.

European producers of all sorts have benefited from better Asia business. Life sciences and advanced materials maker DSM, for instance, has seen business in its materials-based and base chemicals operating clusters improve in June, July and August, running against the normal seasonal trend.

“There is no real restocking but destocking has come to an end,” said DSM CFO Rolf-Dieter Schwalb. He added that the company’s order book was a lot smaller than prior to the crisis.

Dow said on 16 September that business conditions were stabilising and that emerging economies were driving growth.

The US economy had found bottom, Dow Chemical CEO Andrew Liveris said in a presentation to analysts, but he warned that recovery would be slow given the concerns regarding unemployment and consumer spending.

Business is calling for extensions to governments’ economic stimulus plans.

Britain’s “cash for clunkers” scheme will be extended, UK Business Secretary Peter Mandelson outlined on Monday. Other governments might be expected to spin out support for vulnerable industries put in place during the worst of the crisis.

There are signs worldwide that industrial activity is increasing slowly, but there are concerns also about the sustainability of industrial output.

Some companies operating in some economies are more exposed than others. The outlook outlined for the UK chemicals output by consultants Oxford Economics on 15 September is not bright for basic chemicals – the sector is underpinned, nevertheless, by a much stronger pharmaceuticals position.

Basic chemicals output has recovered only disappointingly from the deep trough at the end of 2008, Oxford Economics said.

It now predicts a decline in UK basic chemicals output of more than 20% this year. A peak for growth in 2011 is estimated at 2.25%.

In the US, too, there are concerns about the health of basic chemicals businesses. End-use demand for benzene, for instance, was described by ICIS at the end of last week as “weak across the board, from styrenics to polycarbonate (PC), nylon and even phenolic resins”. The markets are not so much biting back but reflecting reality.

Chemicals output generally remains depressed. And, while one hears of bouts of enthusiasm, there are deep concerns about the sustainability of demand. Petrochemical prices can fall once again if they are not more strongly underpinned. A weakening oil price, too, removes much of the floor for current prices in numerous markets.

As China moves into holiday mode, the rest of the world’s industries can only hold their breath, ever mindful that while demand may be growing and output improving, the balance remains fragile to say the least.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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