INSIGHT: Economic uncertainty will weigh heavily on petchems

11 April 2012 17:50  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Economic uncertainty will weigh heavily on chemicals in the second quarter and volumes are likely to be under pressure.

The slump on the world’s financial markets on Tuesday came in reaction to poor US employment figures, higher inflation and lower-than-expected imports in China, as well as the impact of the still treacherous eurozone debt crisis.

Producers were buoyed by early-2012 re-stocking and pre-buying ahead of possible further price increases. Supply tightness played a part in pushing some prices higher as chemical companies sought to raise margins in the face of higher crude-related feedstock and energy costs.

But the weak economic data and growing concerns over how Spain and Italy will cope with the sovereign debt crisis have once again exposed the fragility of the financial and economic environment. Manufacturing industry and retail markets will be buffeted by the uncertainty. Chemicals suppliers will be squeezed as the robustness of demand down many value chains continues to be tested.

The latest employment report from the US was clearly disappointing with non-farm payrolls, a key indicator of the overall health of the US economy, growing below expectations.

The employment trend is positive but the US economy is just not generating jobs at an encouraging pace. Other indicators look better. Light vehicle sales are expected to be stronger in 2012 although there was a slip in February.

Construction spending is down but as noted by economists at the American Chemistry Council (ACC), residential construction has held steady and the services sector continues to expand.

Data for the manufacturing sector also appears positive although exports have helped drive factory activity.

The latest Institute for Supply Management (ISM) survey reports that chemical industry activity contracted in March but, as the ACC says, this contradicts average March rail car loadings data and hours worked in the chemical industry.

“The latter suggest a large gain in production. Nonetheless, it appears that the 4th quarter destocking was mild and possibly ending and that producers’ inventories of chemicals remain balanced,” the ACC said in its update, released on 6 April.

The Council remains positive in its outlook for the sector but for both the commodity and specialty ends of the business it sounds a note of caution.

The current operating environment is overshadowed by economic uncertainty at a global as well as a regional level. Everyone is concerned about China and the prospect of weaker demand growth for imports which have been the icing on the cake for so many suppliers for so long.

European chemicals demand this year is likely to be flat but generally is not expected to shrink.

For exporters with a low-cost feedstock position, the going may not prove to be too tough, but for higher cost players, times could become even harder.

Consultants Chem Systems on Wednesday noted that petrochemical profitability in Europe and Asia had been depressed in the first quarter given the high cost of naphtha.

“Weak economic activity and a lack of confidence in the outlook lead [led] to frail demand, restricting the opportunity to raise prices and confining margins towards historic lows,” it said in a report.

However, the position was different in the US where the average cost of ethane (which accounts for more than 80% of US cracker feedstock) fell by almost a third from the fourth quarter of 2011.

Ethane cracker margins improved significantly as a result, providing operators with an advantage of more than $550/tonne over naphtha crackers elsewhere, the consultant's data shows.

And, as it points out, demand was more resilient in the US with the economy at least expanding in the fourth quarter of 2011, while growth in Europe contracted.

“Consumption in Asia slowed through the Lunar New Year holiday and was particularly slow to recover this year as market sentiment deteriorated with China cutting target economic growth rates,” Chem Systems said.

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By: Nigel Davis
+44 20 8652 3214

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