INSIGHT: No summer slowdown seen in Europe despite economic fears

27 July 2010 15:55  [Source: ICIS news]

By Mark Victory

LONDON (ICIS news)--I remember when ‘double-dip’ meant a sherbet powder-based confectionary. Nowadays the meaning is not so sweet.

But despite fears of a fall back into global recession, sources across several downstream European chemical markets are predicting that demand will remain strong through August, despite it being a traditionally slow month.

“We are again in a very exceptional time,” a plasticiser producer said recently. “It’s really a strange situation, because usually in August, things are quiet.”

Players in the European polyamide (nylon), maleic anhydride (MA), phthalic anhydride (PA), polycarbonate (PC), styrene butadiene rubber (SBR), recycled polyethylene terephthalate (R-PET), methyl di-p-phenylene isocyanate (MDI), polyols, polybutylene terephthalate (PBT) and plasticiser markets have all predicted that this year the summer slowdown in demand will be limited or not take place at all.

For example, in R-PET, demand is predicted to be 10-15% higher in 2010, than the same period of 2008-2009 - though the global economic downturn in 2008 and 2009 meant that consumption was suppressed in those years.

The increase in off-take has caught chemical market players by surprise. For many, demand so far in the third quarter has been higher than expected.

“The main industries [demand is coming from] are automotives and pigments,” said one MA producer. “We have a lot of requests for derivatives [from Asia]. We had been under pressure in the region for years. Something big is going on.”

The bulk of demand has been reported as coming from the major downstream automotive sector, in seeming contradiction to the latest published EU new car registration data.

New registrations for passenger vehicles in the 27-member EU dropped for the third consecutive month with a 6.9% year-on-year fall in June, the European Automobiles Manufacturers’ Association (ACEA) reported on 15 July.

Higher automotive consumption is largely being driven by Asia, where 2010 growth has been forecast at 12-25% for 2010 by local players. Several, though, have also said that demand is firm in Europe and South America.

Two major tyre manufacturers have confirmed that they will not shutdown in August because of high product off-take, a situation they say is rare.

The same is true in nylon 6,6 and PBT, where one compounder has said that it will not close any of its plants worldwide, in order to try to meet buying interest. The compounder added that this was the first time it would not close plants in August - normally it would shut down for at least three weeks.

Buyers and sellers of R-PET, nylon, and PBT, have attributed the growth in automotive consumption outside of Asia (which is being driven by GDP) to a renewal in purchases of large and luxury car. The reasons for this are two-fold.

First, many consumers, owing to the bearish economic climate, put off replacing larger vehicles during 2008 and 2009, but have now re-entered the market. Second, company cars were not being re-leased, again because of the effects of the economic downturn, during 2008 and 2009, but in 2010 renewals have been strong. 

“The luxury car market is very strong,” a producer of engineering plastics said. “Last year everyone was frightened. This year will be very good for luxury cars, everyone that didn’t change last year, will this year.”

Several producers in chemical markets such as MA, nylon 6 and 6,6, PA, SBR, PC, and R-PET are reportedly sold out of material until at least September.

Some sources in the MA, nylon, vinyl acetone monomer (VAM) SBR markets, along with major tyre manufacturers, have gone further, and are predicting that automotive buying interest will lead to a stronger off-take in the second-half than the first-half of 2010.

“Demand is stronger than supply,” a major tyre manufacturer said. “There will be no summer slow down, and we expect this high demand for the rest of the year.”

If downstream chemical markets are reporting healthy order books for August, then logic dictates that this will feed up chemical chains, as producers downstream will need to source additional raw materials. However, there are several important factors that may prevent this from happening.

Markets such as MA, nylon 6,6 and R-PET have been structurally short since the fourth quarter of 2009. For nylon and MA, this was caused by consolidation resulting from the global economic downturn.

The R-PET market is structurally short because post-consumer collection rates are too low to meet increased buying interest from large companies in order to fulfil social responsibility objectives. This is masking underlying demand figures as customers order additional volumes to ensure supply.

A nylon compounder reckoned that between 5% and 10% of customer orders were fake: “They put in multiple orders to ensure demand. We probably won’t see this impact in the second-half, so we might see a decrease [in consumption], but not in underlying demand.”

More importantly, for upstream markets, limited production capacities also place restrictions on the amount of raw materials that can be consumed.

In addition, continuous demand is not necessarily an indicator of growth in underlying demand.

During the economic downturn, many consumers reduced inventory levels and are now operating on a hand-to-mouth basis. This is forcing them to restock more frequently, serving to level demand throughout 2010 rather than increase it, sources across the markets confirmed.

And demand forecasts are far from certain.

In the midst of continued economic uncertainty, many sources are still unwilling to forecast demand through the third quarter, let alone until the end of the year.

All players predicting strong performance in the second half inevitably add the disclaimer that if macro-economic conditions deteriorate, then their forecasts will change - the predictions are temperamental at best. More worryingly, industry economists are talking of gathering storm clouds.

Forecasting is hardly an exact science but it does appear, at least for Europe’s downstream markets, that summer 2010 will not repeat the lull in buying interest of 2008/2009. Whether this will impact consumption further up the chain remains to be seen. To misquote the opera ‘Porgy and Bess’ - it’s summertime, and the demand ain’t easy.

Additional markets reporting from Heidi Finch, Libby George, Shelley Kerr, Jane Massingham, Truong Mellor, Mike Nash, Linda Naylor, Helena Strathearn, Nel Weddle and Ross Yeo.

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By: Mark Victory
+44 208 652 3214

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