Commentary: Chemical industry looks to fourth quarter for signs of lower demand

19 September 2011 00:00  [Source: ICB]

All eyes are focused on the final months of the year

As downgrades to global and European GDP growth figures are released, the industry is looking to September and the final quarter for signs of lower demand impacting chemicals

The worsening eurozone financial crisis has caused economic growth in the region to stall in the second quarter. New figures from the European Commission have downgraded already insipid GDP forecasts by a quarter of a percentage point to stand at 0.2% in the third quarter and 0.1% in the fourth.

Global GDP forecast figures released last week by the International Energy Agency were lowered slightly, predicting 3.9% GDP growth for this year, down from 4.2%. Much of this growth may have taken place.

Yet, the chemical industry enjoyed a strong performance in the first half of this year and there have been few signs, thus far, of significant deterioration.

In fact, the ICIS Petrochemical Index of global chemical industry prices increased in September to the highest level since June this year.

All eyes are on September and the final quarter of the year for any signs of a slowdown. Commentators suggest the good figures have more to do with tight supply than strong downstream demand.

Planned and unplanned plant outages have combined with some permanent capacity closures implemented in the downturn of 20082009 to create tight supply conditions. This may be masking reductions in downstream demand. There are signs of bearish sentiment emerging in some markets.

The US and EU debt crises have already reduced demand for styrene in Asian markets, which rely on export opportunities. This, combined with a slew of production coming back on stream ­(see page 16) is creating challenging market conditions.

European polyethylene (PE) producers said last week that production cutbacks may be necessary to prevent oversupply. Buying is short-term as players wait to see in which direction the market is moving.

European producers may have more to fear if falling demand from Asia causes Middle East production to be diverted. Already some European markets such as acrylonitrile-butadiene-styrene (ABS) are experiencing an influx of cheap Asian material.

Poor domestic demand means major Chinese ABS producers are operating at around 50% production capacity in an effort to reduce stockpiles.

In Asian caprolactam (capro) markets downstream industries have found it tough to pass on recent price hikes and many are swapping to the manufacture of cheaper polyester yarn.

By: Will Beacham
+44 20 8652 3214

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