INSIGHT: Uncertainty could derail the recovery

07 May 2010 15:33  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The London stock market may have taken the UK’s expected inconclusive election result in its stride but nervousness remains over the potential knock-on effect of the Greek debt crisis.

That nervousness spread across the globe on Thursday, pushing Wall Street and the Tokyo market sharply lower. Heady confidence in the recovery is giving way to much greater uncertainty - and instability - with the EU at its core.

The US economic recovery has looked good on paper but could still be undermined - US construction is still struggling under the weight of the sub-prime mortgage crisis; a high level of unemployment cannot be ignored.

China continues to grow, but as the pedal is taken off economic stimulus, speculative bubbles look set to burst.

This is the uncertainty that raises so much concern in boardrooms worldwide. For chemicals producers, the numbers have looked good this year - and even better in the past two months. But the cries in certain markets that we are almost back to pre-crisis levels of demand and outlook begin to ring hollow.

The increase in volumes in the first quarter, particularly in March, has to be welcomed. Accompanied by sharp price increases they have served producers well. But costs are rising as output is revived. And the demand outlook remains uncertain, particularly as there is little indication as to what is ‘real’ demand growth and what continues to be supply chain re-stocking.

Talk to customer industries downstream from chemicals and you do not perceive a great sense of optimism. Listen to the realists in the industry and you can picture a difficult mid-year and second half.

Chemical companies have undoubtedly benefitted from a resurgence of confidence in physical and financial markets. This week, for example, INEOS has sought to raise more than $900m and seen its bond issue significantly over-subscribed.

So there is confidence in a chemicals upturn - LyondellBasell emerged from Chapter 11 bankruptcy protection in the US on 30 April. China demand is leading the way.

But supply/demand balances are changing dramatically. Upstream, two new crackers were inaugurated this week: the world’s largest ethane cracker at Ras Laffan in Qatar, and Shell’s new cracker complex in Singapore.

ICIS data show that while global olefins output was constrained in the early part of the year by maintenance turnarounds, much greater cracker availability can be expected over the coming months from existing plants and new facilities. The industry is doing business at the beginning of the long-expected and planned-for olefins/polyolefins capacity wave.

In these businesses, particularly, but also in most others, it is demand growth, driven by customer confidence and the ability to operate freely - and not constrained by financial woes - that will prove vitally important.

That is why the uncertainty over the composition of the next UK government - and, on a broader stage, what the European central Bank might do to try to allay the fears at least of the Greek debt crisis spreading - means so much.

Analysts have talked of a “messy state of affairs" in the UK that has unsettled markets and helped drive sterling to a one-year low against the dollar. Equities are down - albeit marginally after an initial slump on Friday. The euro has been “torpedoed” by the eurozone debt crisis.

Sterling, gilts and equities are likely to suffer as long as uncertainty persists and without clear messages about what action will be taken to tackle sovereign debt.

Paul Hodges of International eChem has written in his Chemicals & the Economy blog for ICIS about the “slow-motion train wreck” that is the financial crisis. Unless that is contained, its impact will persist. Financial market confidence will slip away. There will be knock-on effects.

The chemicals sector upturn has momentum but the upward march can be turned and we won’t necessarily be aware of that immediately.

Further recovery in chemicals is by no means certain, a point made by BASF CEO Jurgen Hambrecht on 29 April, when he presented the company’s latest outlook. He added then that “surprises cannot be ruled out for 2010”. Those surprises have the power to derail the recovery.

Bookmark Paul Hodges’ Chemicals & the Economy blog
Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog
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By: Nigel Davis
+44 20 8652 3214

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