OUTLOOK ’11: Europe looks to uncertain 2011 chemicals growth

03 January 2011 13:00  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Europe’s petrochemical producers ended 2010 on something of a high note but with the understanding that the early part of this year at least could be difficult.

Product prices held up remarkably well through the latter part of last year as the oil price tracked higher and most players were able to pass on higher raw material costs.

There was also evidence for stronger volume support for the business as important customer industries began to gather momentum coming out of the downturn.

Most commentators believe that restocking is at an end and that ‘real’ demand growth has taken over in the sector. The rate of demand (and output growth) of most commodity products, however, is expected to slow as the chemicals cycle moves on to favour specialities.

Producers have noted that some products are ‘sold out’ but that operating rates for the production of others are not back to pre-recession levels.

Data collated by the European trade federation Cefic shows that at the end of the third quarter EU petrochemicals production was still 6.2% lower than in 2007 while polymers output was down 8.3%. Third quarter financial performance was strong across the sector but clearly not built on a full return to earlier levels of EU volume demand.

“The September data confirm that the overall situation in the EU chemicals sector continued to improve, said Cefic chief economist Moncef Hadhri at the beginning of December. “The data also suggest that the recovery of the EU chemicals sector will continue in the coming months at a slower pace, with differences in EU countries and chemicals sub-sectors. The forecast remains mostly the same, as overall activity will moderate through the end of the year.”

The Cefic forecast is for chemicals sector output growth of 2.5% in 2011, down from 10.0% in 2010 and compared with the 11.3% slump in production in 2009.

Petrochemicals production growth will slow from 7.5% this year to 1.5% in 2011, Cefic believes, with polymers output growth contracting from 15.0% to 2.0%.

“We maintain our view from earlier this year that the sharp chemicals rebound in 2009 and early 2010 was driven by inventory rebuilding, support measures, and exports. But chemicals output levels forecast for the end of 2011 will remain well below the peak levels reached in 2007,” said Cefic director general Hubert Mandery.

Export demand drove the EU sector through 2010 and while domestic demand has improved, particularly in Germany, Europe-wide it has not reached pre-crisis levels.

Fiscal tightening by European governments and the ongoing eurozone debt crisis provide a backdrop of uncertainty. Raw material prices are climbing with oil to possibly unsustainable highs while the euro fluctuates in value.

“In non-EU countries, economic policies, including current US monetary policy, could provoke asset bubble fears in other countries,” Cefic said in its latest economic outlook. “If emerging economies including China curb their rapid growth, demand for European goods, including chemicals, would ease. But strong economic activity in Asia is currently driving up commodity prices, notably of oil, and destabilising price spikes are possible.”

Recent ICIS analysis indicated that a seasonal slowdown at the end of 2010 will be far less pronounced than is normal in many markets, however.

And some customers were buying ahead of expected January feedstock cost-related price hikes to such an extent that product availability has tightened rather than relaxed.

Some believe that the inevitable is merely being delayed, basing their reduced chemicals output growth assumptions on lacklustre European economic growth in 2011, the sentiment behind which will eventually hit commodity chemical markets.

The European chemicals outlook remains fair but it is clouded with much uncertainty.

EU chemicals production year on year change (%)

	2008	2009	2010	2011
Chemicals	-3.3	-11.3	10.0	2.5
Basic inorganics	-6.1	-18.6	12.0	2.0
Petrochemicals	-4.2	-8.9	7.5	1.5
Polymers	-5.1	-16.4	15.0	2.0
Speciality chemicals	-3.5	-8.3	7.5	2.5
Consumer chemicals	-1.7	-7.0	6.5	2.0
Pharmaceuticals	1.5	3.2	7.0	4.0
Chemicals + pharmaceuticals	-1.4	-5.2	8.0	2.5

Source: Cefic

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By: Nigel Davis
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