INSIGHT: Growing confidence in a stronger 2011

11 October 2010 17:55  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--A report by Nexant ChemsSystems put the dampener on last week's upbeat European Petrochemical Association (EPCA) meeting in Budapest, Hungary.

Producers, traders and others in Budapest reflected a renewed air of confidence in a business environment that, while it had changed radically, appeared manageable at the very least.

Nexant ChemSystems reminded everyone that petrochemical margins were down sharply quarter to quarter in the third quarter this year, particularly in Asia. But they were much higher than in 2008 and 2009 in Europe and North America.

For the third quarter in Europe, Nexant said, petrochemical margins were 15% above the average of the past two decades. Petrochemical margins in the US may have slumped 30% quarter to quarter, but low-cost ethane had helped hold them above the long-term average.

In general terms, petrochemicals have followed, and will continue to follow, the rest of developed world economies down as they adjust to the withdrawal of national stimulus packages and of the reality of debt reduction.

Economic growth in the developed world and in China has slowed, although the emerging economies continue to provide the engine for growth in chemicals.

Demand pull from the emerging markets, particularly China, was vitally important last year and has and has continued to be in 2010, although a wider range of petrochemical intermediates have been in recovery mode.

Stronger demand in important consuming industries in North America and Europe has helped producers maintain prices and buoy margins.

The recovery, therefore, is more broad-based, a fact that will be borne out in the third-quarter financial results of many firms.

But the outlook remains uncertain, with eyes on the health of the economies of the US, Europe and China, and on regional, if not global, demand for chemicals.

Stronger industrial demand in North America and Europe appears to have provided the impetus for chemicals growth in the second and third quarters.

It remains to be seen how recovering sectors of economic output react to the dropping of particular stimulus measures, the apparent ongoing reluctance of banks to lend and the austerity measures being adopted by highly indebted nations.

The US economy is growing below par, the American Chemistry Council (ACC) noted on 8 October and at a pace, it said, “characterised by continued consumer deleveraging”.

The economic indicators published in the US last week were mixed, with headline factory orders down, but influenced by aircraft, and non-defence capital goods orders up sharply. The latter are seen as a proxy for business investment.

The balance between austerity and expansion may be fine but not fine-tuned enough to help underpin some sectors of recovering industry. If that is the case, petrochemicals will suffer.

And yet there are those who believe that while growth has slowed, such an episode can (and possibly will) provoke policy responses: the balance will be maintained.

“We expect the European economy to regain momentum as we move into 2011,” said economists from Credit Suisse on Monday in a note from the bank to clients. “Monetary conditions remain extremely accommodative, and there are growing signs that the recovery in demand is becoming increasingly self-sustaining,” they suggested.

The bank is sticking with its forecast of 2.5% GDP growth in the euro area and in the UK in 2011, although it admits that there will be tensions.

Germany continues to stand out, it says, and it forecasts economic growth of 3.5% this year and 3.0% in 2011.

“There's increasing evidence that what started out as a vigorous export-led recovery is generating much stronger domestic demand,” it adds. “The German consumer is back and here to stay.”

If that is the case, then it is good news for chemicals.

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By: Nigel Davis
+44 20 8652 3214

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