INSIGHT: Industry needs wider recovery to prosper

26 November 2009 17:18  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Hanging like dark clouds over most chemical producers in 2010 are industrial growth and commodity prices. Both have the potential to make or to break the coming year.

Chemicals makers will be dependent on industrial production in 2010 lifting them from the mire. But even that growth could count for nothing if commodity and feedstock prices continue to rise.

Cost cutting has been a feature of 2009 as much as anything else. Companies were forced to rein back hard in the fourth quarter of last year and in the first months of 2009. And even thus far into the year there have been no demand-driven reasons to relax controls.

In taking a view on 2010 many firms have to weigh carefully the potential impact of new supply against expected demand growth. Expected is the crucial word. Taking a view on regional economic and industrial growth is difficult now to say the least.

Not much has changed over the past two months. Uncertainty abounds. The third quarter results period confirmed what many had suspected.

Senior executives in most chemical companies were not so much downbeat as realistic. Cautious in their outlook, they tended to focus on what they were seeing in the marketplace and what their own economists and planners were telling them.

The view was reinforced this week by Moody’s, which, in its latest six-monthly report on chemicals, said the global outlook remained negative.

Volume demand growth is expected to be limited and supply to outstrip demand. Analysts at the credit rating agency are concerned that raw material prices may rise before there any “meaningful” increases in chemicals demand.

"Although there has been a rebound in the last two quarters, producers continue to see limited future chemical demand, and we expect pressure on fourth-quarter 2009 results as downstream industries minimise their inventories towards year-end," Moody's vice president and senior analyst James Wilkins says. "This will mute the improvement from the distressed demand levels of 2008," he adds.

In percentage terms we are beginning to see important industry indicators, such as US rail car loadings, turn up sharply, but we are comparing a still-weak 2009 against and even-weaker (towards the year end) 2008.

And it should not be forgotten that, fundamentally, chemicals production remains down at levels last seen years ago. Petrochemicals, polymers and other bulk chemicals segments remain depressed.

Moody’s is rightly concerned that strong demand growth in Asia could put even more pressure on global commodity markets before the US and European economies fully recover. Margins could, therefore, be kept tight through 2010.

Cost cutting has helped preserve cash through the worst of the downturn but low rates of capacity utilisation and generally weak chemicals prices could squeeze margins and cash flows over the near term.

“Industrial production, a key to chemical demand, must recover for the chemical industry to recover,” Moody’s says in its report.

An extended trough, or rather only slow growth of volumes, and profits, away from the worst of the downturn, will put pressure on stock valuations.

Equities analyst Paul Satchell warned on Wednesday that bullish stock forecasting this year had undermined investor confidence in chemicals.

He senses danger when analysts and investors are more bullish than the companies involved in a sector.

Satchell believes that it is premature to be bullish on the sector until more normal buying patters emerge.

Companies have cut to the bone and reduced stocks and working capital. They are operating on a hand-to-mouth basis, purchasing small volumes only when and where they are needed.

So long as that situation persists the chemicals markets will be stuck in the doldrums.

The business relies so much on the health of other industries and sectors that a more persistent and widespread recovery will be needed before chemicals are kick started again. It is no good simply hoping for the best

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By: Nigel Davis
+44 20 8652 3214

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