INSIGHT: Little confidence as summer slowdown drags on

02 September 2011 16:31  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Sharply lower chemicals growth is expected in the second half of the year but analysts views are mixed on the outcome.

Some see robustness in product portfolios that might protect margins and underpin investor sentiment. At least one, US-based, investment analyst believes his bank will remain a buyer of chemicals stocks as others retreat. The significant downward correction in share prices in recent weeks is seen as a rough patch, possibly just a correction.

But the physical markets are beginning to suggest otherwise. Butadiene demand is sharply lower our, ICIS Europe C4s reporter noted on Friday. Across a large number of products buyers have adopted a wait and see attitude. Some report lower demand for their own products and, in a still high oil price environment, expect lower prices.

Hanging on to margins in the last four months of 2011 is likely to prove to be extremely difficult, so managing expectations in both the physical and the financial market will be vitally important. Producers don’t want to talk themselves into a deeper than necessary downturn.

It depends on how “battle tested” producers are. Companies have emerged stronger from the 2008/09 downturn; they have learned to cleverly manage costs and inventory. They have not really needed to talk up share prices which, before the recent crash, had climbed strongly.

One might assume, therefore, that they are better placed to handle what the macro economy might throw at them over the coming months.

“When faced with a sharp contraction in demand in the last recession, these management teams embraced the ‘value over volume’ mantra by closing plants to manage inventories rather than waiting for conditions to improve,” Citi US chemicals analyst PJ Jukevar said in an investor note earlier last month. Jukevar had coined the term “battle tested”.

“While the pace of economic growth is difficult to forecast, we expect a swift capacity response should a more pronounced slowdown emerge,” he added.

A few weeks later, much slower economic growth in the US, in Europe, and possibly in China, appears increasingly likely. Pessimism abounds with business confidence surveys pointing down – although in Europe, at least, not to below the 2008/09 low point.

Citi has sharply downgraded its economic growth forecasts for 2011. US GDP growth for this year has been lowered by 70 points to 1.6%; eurozone growth by 20 points to 1.7% and China growth by 20 points to 9.0%. The global 2011 GDP growth estimate is reduced to 3.1% from 3.4%.

Having cut its US 2011 GDP growth projections to 1.7%, Goldman Sachs said on 12 August that it expected ethylene demand growth to be half its earlier estimates of 5%.

Chemicals growth in the ethylene chain is typically linked to GDP and industrial production growth, the multiple against GDP globally being 1.3-1.5 times for the past 20 years. The multiple is higher in the developing economies and lower in the more mature chemicals markets.

“The fallout in the industrial economy of fiscal austerity measures in Europe and the US will determine how challenging 2H11 [the second half of 2011] becomes,” Citi’s European chemicals team said on Thursday. “We expect 2H11 to be significantly slower and did so prior to these latest fiscal issues.”

But American Chemistry Council (ACC) economists noted in a report last week that there had been a “marked deceleration [in chemicals production] in some countries and regions, a downturn.” It added that most leading indicators of global industrial activity signalled “further softness”. Global chemicals capacity utilisation was 87.7% in July up slightly from 87.3% a year earlier. Global capacity was 3.9% higher year on year.

The signals are mixed, but worrying, whichever way you look at it.

“Such macroeconomic revisions [revisions of its GDP estimates for the year] are substantial by historical standards but they are nevertheless smaller than they were in late 2008,” Citi says.

In October 2008, the bank reckoned that global GDP growth would slow to 1.8%. Its estimates for growth in 2011 and 2012 now are 3.1% and 3.2% respectively.

Industrial and leading growth indicators are pointing in different directions.

The OECD’s leading indicator has turned negative, Citi notes, but industrial growth seemed to be stabilising around mid-year.

“While US and UK consumer confidence remains very low, the eurozone’s indicator is close to its long-term average.”

A butadiene trader’s comments on Friday highlight the uncertainty.

“The spark of interest [for BD] that we saw from Asia in the previous weeks has now dimmed entirely and all these economic woes mean that US buyers are cautious,” the trader said.

“It is not clear whether the slowdown in demand is due to the summer holidays or whether it is fundamental, but the signs do not look good.”

($1 = €0.70)

Paul Hodges studies key factors influencing the chemical industry in his Chemicals and the Economy blog for ICIS


By: Nigel Davis
+44 20 8652 3214



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