INSIGHT: Seeking stability as EU and US chemicals struggle to grow

14 December 2011 17:54  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--While the news from Brussels is bad, that from Washington is a bit better. “Recent US economic data continue to point to a clearly positive recovery rather than to one on its last breath,” credit ratings agency Standard & Poor’s (S&P) said this week.

“The US recovery was able to withstand shock waves from the Congressional Super Committee's failure to reach the debt compromise and the ongoing European debt crisis,” it added.

A slowly recovering US brings some encouragement to a chemicals sector currently struggling to move volumes and grow.

The (latest) downturn has been sharp and has hit companies hard – DuPont’s own downgraded expectations for 2011 highlight the pressure on polymers and other parts of its business, most notably chemicals for electronics and those used in construction.

At the grass roots level in Europe there is talk that at least one chemicals distributor has reduced its payment terms to 14 days. We are in a situation at this calendar year end where no-one wants to hold inventory that could be worth a lot less in the New Year.

The decline in chemicals output in Europe has been severe as European trade group Cefic’s chief economist, Moncef Hadhri, noted on Wednesday.

“On a year-on-year basis for quarterly growth, the pace of EU chemicals industry output decelerated from 5.4% growth in the first quarter 2011 to 0.2% in the third quarter. The current production trend of the EU chemicals industry is in line with the current world economic climate, where overall confidence has worsened.”

By the end of September, it was only relatively high chemical prices, particularly of petrochemicals, that could raise a smile for the sector in Europe. Since then, of course, prices have marched downward as financial uncertainty has mounted and chemicals demand has continued to fall away.

Data from EU statistical agency Eurostat on Wednesday showed that chemicals production in October was down 2.1% year-on-year in the 27-member EU and down 3.2% in the eurozone.

“Growth in European chemicals output will be weaker than expected this year and next because of heightened business uncertainty and inventory trimming,” Cefic said on Tuesday when it released its year-end outlook.

The trade group’s view on growth has see-sawed through the year, having been posted at 2.5% at this time last year but raised to 4.5% in mid-year, towards the end of a particularly strong first half.

“The group’s summary forecast of chemicals sector economists predicts year-on-year growth of chemicals output for 2011 is likely to be 2.0%, in line with the historical trend growth rate and against 4.5% expected in June,” it said in a statement. "Expansion in 2012 will probably reach 1.5%,” it said.

The eurozone debt crisis has latterly hit macroeconomic sentiment hard, while the US debt burden overshadowed the outlook earlier.

“Companies are hoarding cash,” said Cefic president Giorgio Squinzi. “The uptrend in oil prices has halted, reducing the incentive to buy ahead.”

Cefic’s 2012 forecast is based on EU GDP growth of just 1.0%, down from 1.8% in June, although it acknowledges the risks are mostly on the downside.

The swings in European and global financial markets in recent weeks underscore the uncertainty and the way the EU appears to be stumbling through the sovereign debt crisis.

“The recovery from the worst recession since the Great Depression has stalled,” American Chemistry Council (ACC) economists said on Monday. They talked of an emerging recession in Europe and slowing growth in east Asia.

East Asia demand has been a huge driver for the chemical industry since the 2008–2009 downturn, so less vibrant demand growth from the region will be keenly felt.

Competition across the industry is fierce, Squinzi noted, citing emerging shale gas cost advantages in the US and the fast-growing output of players in the Middle East.

Yet, “if the eurozone can finally establish an effective solution to the debt crisis, and deliver credible actions to stabilise markets and confidence, the European chemical industry can look forward to renewed growth through 2012”, he said.

Strong overseas (emerging market) growth alongside favourable energy (shale) dynamics will aid US chemical exports in the years to come, the ACC said.

“Getting past near-term softness, the outlook for chemicals points to modest growth over the next several years and depends on strengthening domestic demand and an improvement in exports abroad.” 

($1 = €0.77)

Read Paul Hodges Chemicals & the Economy blog
Bookmark John Richardson & Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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