INSIGHT: Continued strains on growth weigh heavily on chemicals

27 March 2012 15:52  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The strains on GDP growth in Europe have not eased while politicians argue about the size of the eurozone bailout fund and the financial markets worry about Spain.

German Chancellor Angela Merkel does not want to see the size of the bailout fund run above €700bn ($933bn), but the pressure for a further increase is intense.

The Organisation for Economic Cooperation and Development (OECD) weighed in on Tuesday, saying that the European stability fund needs to be boosted to at least €1,000bn. The current level of funding is not enough to restore market confidence, it said.

“A credible financial firewall will provide governments with the breathing space they need to focus crucially on revitalising Europe’s economic growth and competitiveness,” the OECD statement said.

Undoubtedly, it is growth that is lacking as EU member states focus on spending curbs in the face of the overarching sovereign debt crisis. Growth comes a poor second on the agenda.

The European Commission has forecast zero GDP growth for the EU in 2012 and a contraction of 0.3% for the eurozone, while the latest OECD estimates are that the eurozone will grow at a rate of only 0.2% this year, following a contraction in output at the end of 2011.

“Weak financial conditions, fiscal consolidation and economic adjustment are restricting demand in the short term before the long-term benefits of stability and growth are felt,” the OECD’s secretary-general, Angel Gurria, said on Tuesday.

“Decisive action to restore confidence and support demand is needed now.”

Gurria said the challenges for Europe “remain daunting”, despite the steps taken to underpin the economies of Greece, Italy, Portugal and Spain.

Financial market uncertainty has eased as huge sums of money have been pumped into the Greek economy, but attention has been increasingly drawn to Spain.

Chemical producers continue to face considerable headwinds and great uncertainty in markets in which the level of “real” demand is questioned. Producers are still pushing through price increases, but the rate of increase has slowed markedly since February, given the uncertain demand outlook.

In major markets, such as butadiene (BD), participants are seeking a compromise position, with customers arguing that demand for their products is uncertain, while producers seek to recoup margins lost to the higher oil price. A similar situation is playing out in other markets.

European firms have been buoyed by exports, as full-year 2011 financial results showed, but the latest trade data illustrate the fact that the EU chemicals trade balance with Asia is deteriorating in almost all segments. The EU chemicals trade performance last year, however, was much better than the 20-year, long-term historical average from 1990 to 2010.

This reliance on trade with regions outside the EU is pivotal in a low local growth environment, and draws focus on major markets such as China.

This is why China’s industrial slowdown in the first few months of 2012 and the outlook for the remainder of the year are so important.

The profits of Chinese firms in petrochemicals, automobiles and metals were lower in the first two months of 2012 than at any time since the January–August period in 2009, data from China’s National Bureau of Statistics (NBS) showed, Reuters reported on Tuesday.

The latest data are a further illustration of the slowdown being experienced in China, as the government takes steps to counter the property boom, and as manufacturing exports to the rest of the world slow.

Chinese chemical industry profits fell 28.8% year on year in the first two months of 2012, the NBS data show, with some enterprises in petrochemicals, coking and nuclear fuel processing in loss, Reuters said.

($1 = €0.75)

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By: Nigel Davis
+44 20 8652 3214

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