OUTLOOK '12: Lack of visibility adds to concerns for EU chemicals

03 January 2012 13:20  [Source: ICIS news]

By Nigel Davis

Cloudy outlookLONDON (ICIS)--Chemicals output in Europe slowed markedly in the fourth quarter of 2011 – and the outlook for 2012 is subdued.

Demand growth in 2012 is expected to be lacklustre based on the assumption that major EU economies are close to or are in recession. The eurozone debt crisis looms large over the region and, with no clear political solution for the sovereign debt overhang, visibility for 2012 is poor to say the least.

Petrochemical producers' operating rates were cut in 2011 as companies sought to match output to demand. The situation was difficult but not as dire as in late 2008, when customer industries and some chemical producers were forced to close manufacturing plants during the winter holiday period.

From September 2011, producers resolved to manage operating rates through what they essentially saw as a soft patch. Sharply deteriorating economic conditions hit the sector from October until the year end.

In October, the eurozone's composite Purchasing Managers Index, a key manufacturing industry indicator, registered its steepest decline since July 2009.

New industrial orders in the eurozone have been falling in recent months and the slowdown has spread to services and produced a difficult Christmas season for retailers.

Chemical producers have continued to pull back their output, with cracker operating rates, by some estimates, in the 50–70% range since October. European olefins players can expect only a slow, moderate recovery in demand in early 2012. Producers say they have difficulty seeing weeks ahead, let alone months.

Downstream, polyolefins in particular remain under pressure, with end-use demand weak and prices at what producers call unsustainable levels. The market has attracted imports, exacerbating already difficult conditions.

As ICIS has noted in its Europe polyolefins outlook, cracker and polyolefin production rates were cut back drastically in the last weeks of 2011. The flood of material from new capacities in the Middle East has finally hit European shores.

Petrochemical and polymer producers in Europe face a difficult and uncertain first half but expect a political solution to the eurozone crisis to calm financial markets and to help alleviate the downward pressure on physical markets later in the year.

Growth in European chemicals output in 2012 will be weaker than expected only six months ago because of heightened business uncertainty and inventory trimming, the European Chemical Industry Council (Cefic) said in December.

The trade group suggested that output growth would be 1.5% in 2012, down from an already revised estimate of 2.0%. In June, the group had forecast 2012 European chemicals growth of 4.5%.

Its GDP forecast for the EU in 2012 was also cut back sharply, to 1.0% from the 1.8% predicted in June.

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

“Added to this is increased business uncertainty, which is encouraging reductions in inventories. Lower output growth is the inevitable result.”

The outlook is clouded by downside risks. EU chemical producers rely heavily on exports, so demand growth in the US and Asia is vitally important to them. Anything that destabilises growth in either key region can exacerbate an already difficult European position.

Looking at historical data in December, Cefic’s chief economist, Moncef Hadhri, said: “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 of 2011 to 0.2% in the third quarter.

“The production trend of the EU chemicals industry is in line with the world economic climate, where overall confidence has worsened.”

Read Paul Hodges Chemicals & the Economy blog for ICIS

By: Nigel Davis
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