19 March 2012 00:00 [Source: ICB]
As the economic fog nestles densely across Europe, the German economy still seems to be standing as a beacon. Although Germany's light may have dimmed over the past few months, industrialists and economists agree that the weak fourth quarter was probably the bottom of the trough.
In its latest economic forecast for the EU 27, the European Commission says Germany's gross domestic product (GDP) increased by 3% in 2011, down from 3.7% in 2010, and employment reached its highest level in 20 years. At the same time, capital investment in machinery, equipment and even construction expanded. For 2012, the Commission sees improved sentiment in both companies and households, suggesting that the downturn in the fourth quarter is likely to have been a temporary interruption.
German automobile sales to North America continued to grow last month
For Germany's chemical industry, which accounts for nearly 22% of the country's GDP, the problem is the outlook for countries that buy its products, directly or indirectly. Revising downward estimates of November 2011, the Commission now predicts that GDP of the EU 27 will stagnate in 2012. In the euro single currency zone, a setback of 0.3% is forecast. What's more, it says, the economic climate tracer "is in the contraction area in all countries except Germany, which remains in the downswing area and moving in the direction of expansion."
Globally, too, the soft demand predicted in autumn 2011 continued in Q1, but the EU's economists are more upbeat about North America - an opinion that seemed to be shared by major multinational chemical players in their annual results presentations as well as by economists for the German chemical industry association Verband der Chemischen Industrie (VCI) . The US is said to be experiencing moderately stronger growth than expected only a few months ago. While Japan's economy ended 2011 on a weak note, the perspective of moderate growth in 2012 remains intact.
In view of the uncertain outlook, Germany's chemical industry has every reason to be cautious. Well over 80% of production is exported directly or indirectly, as German automobiles and machinery, for example, are valued - and bought - by consumers the world over. More than 60% of German chemical output is sold within the European Union.
Under more auspicious circumstances, the German chemical industry's record performance in 2011 might have been no cause for complaint. Production rose by 2.2% year-on-year, selling prices by 5% and sales revenue by 7.7% to €184bn ($243.33bn). Business with domestic customers grew by 6% to €75bn and foreign trade gained nearly 9% to €150.6bn, including exports by chemical producers' customer industries. Chemical firms continued to add personnel, with employment rising by 3% to 427,000 - the same level as before the 2008-2009 economic slump.
QUARTER FOUR SHOCK
But even if the performance weakened quarter by quarter last year, the final three-month period was a shocker. Instead of an expected upturn, VCI figures show output down by 2% in Q4 against Q3 and by 4.3% year-on-year. Sales sank by 2.3% against Q3. The rise in selling prices came to a standstill, even if still landing 4.7% above the 2010 quarter. Capacity utilization, although declining to 81.7%, remained in the normal corridor.
With the European sovereign debt crises and the acrid budget deficit debates in the US creating an atmosphere of uncertainty, buyers of chemical products became increasingly cautious about ordering in Q4 and the growth spurt at year's end expected by many producers failed to materialize, according to the VCI. "It became increasingly clear that even in Germany the growth engine had begun to sputter," says Utz Tillmann, the industry association's managing director.
MOOD IS BRIGHTENING
The mood is brightening, however. "The downswing appears to have bottomed out in the fourth quarter, and the economic indicators are pointing upward," says Tillmann. While warning of possible hurdles along the path to recovery, the VCI manager says German chemical producers do not believe that the debt crisis of many consumer countries will widen into a full-blown economic crisis. Also, they are convinced that customers' inventories must be nearly empty.
Somewhat encouraged by more economic forecasts for a number of economies, including Germany, the producers' association is predicting sales growth of 1% in 2012 for its member companies. As output looks likely to stagnate at the high 2011 level, the increase will have to come from higher selling prices above the current plateau.
Business with foreign customers is expected to improve by 1.5% year-on-year, due to the dynamic Asian and South American market. Growth in Germany is forecast to be around 0.5%.
The association points out that this year's statistical carryover of nearly 3.8% (assuming that output in 2012 remains at the 2011 level) means that production would have to grow from quarter to quarter to stay even with last year. The VCI's cautious estimate for Q1 2012 sees production and sales making slight gains against Q4 2011, but settling substantially below the Q1 2011 level.
Since the 2008-2009 downturn, German chemical producers have learned several lessons, in particular that flexibility is crucial and that highly-qualified employees are essential to businesses remaining healthy. Labor relations in Germany are friendly, and the chemical union IG BCE is willing to sacrifice steeper linear wage increases for the sake of job security. Also, chemical producers have developed tools for temporarily slowing production without laying off workers.
It is this pragmatic approach that gives German chemical companies the strength needed to weather economic storms. As a decisive influence, the VCI also points to the nationwide integrated production structure, which links chemical production with that of downstream industries and improves innovation.
CHEMICAL CUSTOMER INDUSTRIES OPTIMISTIC
The German business climate was optimistic as 2012 started, a survey by the Munich-based Ifo economic research institute found. Manufacturers were the most upbeat, saying that capacity utilization was above-average.
The automobile industry association Verband der Automobilindustrie, which represents the German chemical industry's most important customers - reported higher sales of new vehicles in January in all regions except western Europe and China. German carmakers exporting to North America said February was one of their best sales months since the last economic downturn.
The construction industry, a leading early indicator of economic development, said its business climate improved in January for the third consecutive month, even if order levels were not quite as high as expected in December.Germany's electrical and electronics industry association Zentralverband Elektrotechnik- und Elektronikindustrie said that although sales gains in January were slight, the outlook for its members in the full year 2012 was "markedly better."
Plastic packaging manufacturers organised in Industrievereinigung Kunststoffverpackungen (IK) also are more upbeat than three months ago. Two-thirds of companies responding to an association survey expected sales to at least remain stable in Q1 2012, while fearing that higher polymer prices could depress earnings. About a third of survey participants forecast declining exports.
After setting new sales records in 2011, German plastics machinery manufacturers expect their business to cool off in 2012. The committee for plastics and rubber in the industry association VDMA said a sales decline of around 7% appears in store for 2012.
For the auto industry, the VCI's economists forecast a production rise of 0.5% in Germany for 2012, 1% in the EU and 11% in the US. Output of machinery is seen as growing 1.5% in Germany, 1% in the EU and 5% in the US.Electrical appliance output is thought likely to improve by 1% in Germany and 4% in the US while shrinking 1.5% in the EU.
For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.
Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.
Sample issue >>
My Account/Renew >>
Register for online access >>
|ICIS Top 100 Chemical Companies|
|Download the listing here >>|
Asian Chemical Connections