INSIGHT: Building confidence on a house of cards

05 February 2010 16:44  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Sentiment is mixed among players in the chemicals sector. Executives in Europe are more confident than they have been for some time. But, still emerging slowly from the downturn, they aren’t quite prepared to throw caution to the wind, although 2010 certainly looks brighter than the dismal year that was 2009.

Down in the market, not a great deal is stirring. If buyers' talk is anything to go by, customer industries are not yet providing sufficient market pull to draw business out of the depths. Some players suggest that demand currently in Europe is "built on a house of cards".

Confidence in EU chemicals has risen above the long-term average for the first time in 18 months, the European Chemical Industry Council (Cefic) said earlier this week. The chart illustrates the swing in sentiment through the downturn.

Confidence in EU chemicals continued to improve in January 2010, Cefic said, referring to data compiled by the European Commission, "rising significantly by 5.1 points compared to December 2009".

EU chemicals confidence indicator

That must be good news, of a sort. EU chemicals executives are expecting output to increase. Confidence increased sharply in the UK followed by the Netherlands, Germany, Spain and Belgium. But managers in Italy were less confident last month about incoming orders. Confidence in future production levels was less in France and Poland.

A key point was that order books showed some improvement in January but were still low compared with the long-term average.

Dow Chemical CEO Andrew Liveris this week also put the outlook into perspective when he said he expected a “lazy V-shaped” economic recovery. Financial analysts took that to mean steady but slow global progress.

Dow and most other chemical companies are seeking to benefit from stronger business in Asia but are hidebound by a lagging recovery in Europe and North America. The pressure is on to pass through higher raw material costs, but that only seems to be bearing any fruit upstream, and where demand from China is drawing out exports.

Last month, for instance, LyondellBasell said that its polymers outlook continued to remain dependent on opportunities to export polyethylene (PE) from the US.

And consider some of the following quotes made this week from buyers in downstream markets in Europe.

“Our business is so slow that I don’t think I will be doing any buying this month,” said one buyer of expanded polystyrene (EPS).

Producers were trying to recover margin following styrene price increases in January, although the styrene contract price for February had dropped.

Downstream demand for polycarbonate has suffered following the withdrawal of government incentives that had buoyed automobile demand. Cold weather also has had a negative impact on sales into the construction sector.

“There is low demand and oversupply,” said one distributor. “The oversupply will continue for the next six months. There will be no problems with availability.” Producers were countering that they needed to lift prices because of the pressure on margins from rising upstream bisphenol A (BPA) costs. BPA had risen on the back of higher priced benzene.

The battle to cover costs is getting tougher as increases in feedstock costss put pressure on many chemical chains. Demand from Asia is buoying some markets, but domestic demand generally remains weak.

“When the birds start singing and the sun starts shining, maybe customers might start buying again,” said one methyl methacrylate (MMA) buyer at the end of January.

Confidence in the sector from without is also thin. Financial analysts still prefer defensive stocks: those where margins and demand have, historically, been more robust. That, for the most part, means the more highly focused specialties, life science-oriented and agrochemicals makers. The option to take a punt on leading edge commodities is simply not there, given the projected supply overhang from the Middle East and the new capacities due on stream in Asia.

There is some life in the mergers and acquisitins (M&A) market, and noteworthy in late January and early February has been the activity of non-European and non-US players in the market. Agreed deals have involved companies from Brazil, Mexico and South Korea. This is the “slow thawing” of the global chemicals M&A market seen by analysts.

The fragility of the perception of chemicals on the financial markets, and of the markets themselves, however, is exemplified by the withdrawal on 3 February of the Taminco IPO (initial public offering). The investor in the amines producer, CVC Capital partners, had been hoping to cash out of the business to the tune of €250m ($342m).

Confidence is a state reached though a complex mix of perception and reality. In chemicals, we perceive the upturn this February, but are far from certain as to its reality.

($1 = €0.73)

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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