INSIGHT: A return to more normal rates of growth

03 September 2010 15:57  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--There is every reason to be deeply concerned about the prospects for global demand growth.

The US economic slowdown appears to be deep-rooted and a reflection of much weakened consumer spending power. The big shift from spend to save - which is apparent in Europe too - heralds an era of slower growth. Chemicals demand will be hit.

Global chemicals output will be directed towards stronger markets - principally in Asia but also in Latin America. Competition will be more intense.

Underlying the changed market dynamics will be the question of cost. And the opportunities to access faster growing markets will be hard fought. This suggests that most producers will redouble efforts to drive into China in a production as well as distribution/marketing capacity.

The changed feedstock picture in the Middle East raises clear competitiveness issues. True, nation states and producers in the region will be keen to diversify and expand based on their perceived competitive feedstock advantage. But some tough questions are being asked by investors across the region who do not necessarily see the rate of return they want.

Does that mean that further development of the sector continues to lie in the hands of state-run enterprises or of companies with a considerable proportion of state control? Petrochemicals is not necessarily a place for the investing public, as wise heads have said before.

The new feedstock outlook in the US plays intriguingly into this mix. Shale gas is a game changer that could underpin more petrochemicals investment. Might the need for such assets, however, be driven in the first instance most realistically by dynamic demand growth from Latin America?

The strains put on C3s and C4s by changed refinery and feedstock dynamics open up opportunities. The careful management of output to demand, driven itself by the financial crisis and the need to retain a much tighter hold on working capital, is a characteristic of this business that will not change any time soon. Subdued demand growth in the second half of 2010 and possibly only slow growth in 2011 will help see to that.

Also, companies will have to start spending again soon if they are to maintain operating reliability. The tight management of cash has put strains on parts of the supply chain and will continue to tell in certain markets.

A critical question for European producers is just how much longer they can continue to benefit from European demand growth.

The news is not all bad. Some analysts believe that the major European economies can continue to grow this year and next.

The second quarter was the strongest so far and it probably is down hill from here for the remainder of 2010. But the US slowdown may not necessarily be linked with a significant change in European growth.

Petrochemicals tend to be early reflectors of good and bad news.

European petrochemicals production was up 42% from the bottom of the slump, Cefic showed this week. But the chemicals trade group’s petrochemicals production index also indicated that output has yet to reach the peak achieved in January 2008.

The recovery has been remarkable, and particularly so in polymers in the first half of 2010, but polymers output was flat in June: probably a sign of things to come.

Chemical industry executives need to be cautious.

Germany’s chemicals trade group VCI on Thursday talked of less optimism in the sector against the backdrop of a looming economic slowdown: in the US, Europe and China.

The days of the big gains in output probably are over. The VCI suggests a return to more ‘normal’ levels of output growth.

Germany’s chemicals makers have, so far, only caught up with what was lost in the crisis, the VCI says. The downside risks associated with the slowdown in the US, overheating in China and the debt crisis in southern Europe potentially are severe, particularly to this significantly export-driven industry.

The VCI is sticking with its earlier output forecasts for Germany’s chemicals sector in 2010: chemicals production up 11%, prices up 2.5% and sales growth of 18%.

In the uncertain second-half environment export sales will again be tremendously important. They rely heavily on demand from Asia and from Latin America.

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By: Nigel Davis
+44 20 8652 3214

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