INSIGHT: Confidence grows in Europe’s near-term recovery

03 November 2009 17:31  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--DSM provided further evidence on Tuesday for the slow recovery.

The third-quarter outturn for the company was lifted by a strong operating performance that beat analysts’ expectations. The big winner was performance materials, where prices and volumes grew 10% sequentially. Base chemicals volume growth recovered significantly, with elastomers back to 2008 levels. Polymer intermediates volumes were higher quarter on quarter in 2009, with growth in Europe and Asia.

“The underlying trend can be described as a mixture of a clear recovery in some end markets (especially China, where sales were 16% higher than the third quarter of last year) and some downstream restocking in other areas which, however, are still lower, such as automotive,” managing board chairman Feike Sijbesma said. “The year-on-year percentage drop in sales volumes in the businesses affected by the economic downturn has returned to single digit,” he added.

Prices are still lower than last year, but this is partly due to lower raw material prices in materials and chemicals businesses, the company said. Sijbesma added that pricing power generally was strong.

Sequentially, prices were up 23% in polymer intermediates in the quarter and up 4% in base chemicals and materials.

The encouraging news is that business conditions have been improving for the company’s performance materials and polymer intermediates. The products in these business clusters include engineering plastics and chemicals such as caprolactam and acrylonitrile. “At this moment, none of the businesses in these clusters are reporting a further decline in demand in their end-markets,” Sijbesma said, but he added that approximately 30% of end-use markets are still down at low levels.

In resins these are markets in transportation, trucks and yachts. There are no “significant” signs of improvement in building and construction.

DSM says it is gaining market share in automotive markets for engineering plastics based on innovation and government stimulus packages. Textile and tyre cord markets bottomed out in Asia in the first quarter and have picked up strongly. European demand for caprolactam and acrylonitrile has improved.

The improvements are welcome, but DSM notes that 30% of its businesses in materials sciences are still down compared with year-ago levels. The situation will look better in the fourth quarter, given comparisons with a weakened period in 2008, but DSM noted that demand is still fragile and the economic outlook remains uncertain. “The movements in inventories in the value chain as well as the development of end-demand are difficult to separate and predict,” Sijbesma noted.

The tone of the company’s remarks was reflected in the big-picture view for the EU economies released by the European Commission on Tuesday.

There were few surprises in projections, which reflected the enormous strain put on countries across the region through the recession and the expected aftermath. Unemployment and short-time working weighs heavily on most countries. Public spending ratios have increased markedly.

Gross domestic product (GDP) is expected to fall by 4% in both the EU and the euro area this year. The recovery has been relatively strong but the situation worse at the end of 2008 and the start of 2009 than initially estimated in the Spring.

The recovery may surprise on the upside in the short term, the Commission says, but its sustainability remains to be seen.

“The situation has improved – mainly due to the unprecedented amounts of money pumped into the economy by central banks and public authorities – but the weak economy will continue to take its toll on jobs and public finances,” Economic and Monetary Affairs Commissioner Joaquín Almunia said.

“We need to continue implementing the recovery measures announced for this year and 2010 and accelerate the repair of the financial sector to make sure banks are ready to lend at reasonable terms when companies and households resume their investment plans,” he added.

“And we need to define a clear, credible and coordinated 'exit' strategy to put public finances progressively back on a sustainable path and to find the necessary resources to increase Europe's growth and jobs potential.”

The Commission sees the inventory cycle at a turning point and confidence improving in almost all EU sectors and countries. “The near-term outlook is favourable," it suggests.

The economic growth forecast for 2010 and 2011 is, however, muted, reflecting not simply current uncertainties but the impact of the burdens adopted to manage the banking crisis.

Sizeable stimulus measures, some of which have yet to be implemented in some member states, continue to play a significant role in the recovery. The EC reckons there are reasons to be “moderately optimistic”. But the full impact of the recession on employment and on public finances is yet to come, it stresses, and the correction in housing markets continues to hold back construction investment in several countries.

It warns the recovery may prove to be “volatile and sub-par further down the line”.

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By: Nigel Davis
+44 20 8652 3214



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