INSIGHT: Developed world's slow recovery to weigh heavily on chems

02 December 2009 17:58  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Close to the end of the year, it is worthwhile to draw a little breath and take stock. The global economy is emerging from its steepest downturn since the Second World War. The chemicals sector, climbing out of recession, faces structural problems of its own that are likely to squeeze margins for many olefins and polyolefins makers.

It remains to be seen whether the lift to business in the third quarter will be carried over into the final three months of the year. The pull of China demand has continued, although not as strong as earlier, but welcome nevertheless.

The American Chemistry Council (ACC) on 1 December forecast a 2.9% fall in global GDP in 2009 and 4.6% drop in global chemical industry activity. Economic activity will grow by 2.8% in 2010 and possibly by 3.2% in 2012, the US trade group says.

Chemicals output is forecast to bounce back with growth of 4.6% next year. But it does not look as though the recovery will be as strong as in 2004, when output grew by 5.4%.

The monthly data suggest a “V-shaped” recovery, ACC economists say, but it is clear the “V” will be more pronounced in emerging nations, where chemicals growth of 6.9% in 2010 and 7.6% in 2011 is forecast.

Developed-world chemicals growth is expected to average 3.3% between in 2010 to 2012.

But recovery is bringing with it not reward but a broadening realisation that it will take years to achieve pre-recession levels of chemicals output.

The emerging nations are on a different chemicals trajectory to most of the world, where low levels of activity will pressure margins for some time.

Looking at the US, the ACC notes that capacity utilisation across the sector slipped to an average of 70.1% in 2009. The soft recovery will hinder operating rates in 2010, it suggests, but the rate could improve to 78.5% by 2012.

“This implies that the industry is operating far below its optimal capacity utilisation levels, which suggests lower production efficiency and reduced margins,” it says.

It also needs bearing in mind that this year the cuts have run deep. US chemical industry research and development (R&D) spending is likely to have fallen by 3.2%, the ACC says, and capital spending to have been slashed by 20.1%.

Don’t expect a bounce back soon. Research spending should improve next year, but it will be past 2012 before capital spending reaches its recent peak.

Given the uncertainty over the outlook for the US economy, the ACC has two alternative scenarios to its base case (which assumes a slow economic recovery).

If pent-up demand is a driver, then a stronger growth, “V-shaped” recovery could drive the chemicals business in the US. The double-dip outlook is more pessimistic.

All three views of the future are shown in the table.

Alternative scenarios for US chemicals

Change on previous year (%)	2010	2011	2012
Base Case
US GDP	2.6	2.6	2.8
Chemicals production, ex pharma	3.0	3.3	3.4
Sharp V
US GDP	3.6	3.5	3.8
Chemicals production, ex pharma	6.0	5.3	4.7
Relapse
US GDP	0.9	1.1	2.0
Chemicals production, ex pharma	-0.2	1.8	2.9

Source: American Chemistry Council

Having begun the year in the midst of the worst recession since the Great Depression, the industry is operating in more benign, although hardly buoyant, conditions.

Exports have driven business in the US, Europe and elsewhere. The outlook suggests moderate output growth in developed nations but more buoyant business in the emerging economies.

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By: Nigel Davis
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