INSIGHT: Facing a difficult second half

26 July 2010 17:16  [Source: ICIS news]

LONDON (ICIS new)--The global chemicals recovery is losing momentum amid fears of a wider economic slowdown and, for some nations, a possible ‘double dip’ into recession.

US chemicals output growth has slowed and railcar loadings, a good indicator of sector activity, have looked weaker. In its latest weekly report, the American Chemistry Council (ACC) suggests that “storm clouds are gathering as the economic reports point to further weakness in the economy”.

Housing starts and home sales are down. Building starts, an indicator of future building activity “remain at historically low levels”. A further fall in the index of leading economic indicators, the second within the most recent three months, suggests weaker economic growth. Not surprisingly, the US - and Asian - financial markets reacted negatively last week to remarks from Federal Reserve chairman Ben Bernanke, who described the outlook as being “unusually uncertain”.

Global markets have reflected US economic uncertainty following the reaction a few weeks ago to Europe’s debt crisis. It would take further shocks to the system to push economies back into recession but the fears remain, nevertheless.

The Economist Intelligence Unit (EIU) said on Monday that a recent survey it had conducted showed that the greatest concern of senior executives is that some of the world’s major economies may fall back into recession

“North American and Asia-Pacific respondents are most concerned about the possibility that the economy will once again slip into recession - 43% and 40%, respectively, list it as their main concern, against 29% from western Europe,” the EIU said. “The North American sentiment seems to echo US Federal Reserve chairman Ben Bernanke's warning of last week that the US economy faced ‘uncertain prospects’.”

Weak demand is the foremost risk in the second half, managers from a range of industries said, and the EIU is not surprised given the fragility of the “nascent recovery”.

The EIU says its forecast plays down the risk of a double-dip recession but points to a sustained period of slow growth. The lift to growth given by the range of stimulus measures given in multiple economies is giving way to fiscal austerity and structural reform.

In chemicals the ACC data have charted slowing chemicals production growth over the past few months. Gains have been made on last year, but the numbers again point to slowing growth.

“Overall industrial output slowed to a crawl during the month of June as the boost from inventory restocking along the supply chain has played out. Chemical production fell for the third straight month,” the ACC said in its latest economic report.

Output data show production growing for inorganics, industrial gases and fertilizers but falling for organic chemicals, plastics and a range of other materials.

The pace of the gain in output - the ACC and global numbers are derived on a three-month moving average basis - from June last year to June 2010 suggests also that the global recovery is slowing, the ACC says.

Chemicals production March-June 2010

Production Volumes

March

April

May

June

(% Change year-on-year - 3 month moving average)

 

 

 

 

World total

13.3

12.9

11.9

10.3

US

6.8

5.2

4.5

3.5

Latin America

14.9

15.3

12.9

9.5

Western Europe

10.6

11.7

11.6

10.6

Central & Eastern Europe

19.1

19.2

19.6

19.0

Russia

32.9

31.1

29.1

26.6

Africa & Middle East

10.0

11.5

12.7

12.3

Asia Pacific

19.7

18.1

16.0

13.4

Japan

9.0

10.1

9.4

 

Asia Pacific excl Japan

20.3

17.3

14.6

 

China

22.5

20.1

17.5

 

India

7.9

7.0

7.1

 

Chemicals including pharmaceuticals. Source: ACC

Recovery has turned into expansion in many countries, including China, India, Russia and South Korea, but industrial production indicators suggest slowing growth.

The ‘V’-shaped recovery in Asia Pacific has stalled, or “dissipated” in the ACC’s words. European output growth has continued to show strong gains but there has been individual national output weakness.

Production in the UK, for instance, has dropped for the past three months compared with the year-ago periods. UK chemicals output is slewed considerably towards pharmaceuticals, a segment facing tough times, but the country’s more basic chemicals output has not recovered strongly.

The situation across western Europe is generally different, with a strong rebound apparent from the sharp fall in output in 2008-2009 in countries such as Germany and France.

The pace of growth, however, eased off slightly in June and prospects for the second half do not look good.

Chemical company executives have to be concerned that the switch to austerity being undertaken in some of the major national chemical markets will have a significant impact on demand in the second half of this year and into 2011.

Still by no means fully recovered from the downturn, their companies face a tough battle to hold on to markets and margins.

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By: Nigel Davis
+44 20 8652 3214



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