FocusIndustry players wary of future after Greek elections

14 June 2012 15:43  [Source: ICIS news]

By Janos Gal

LONDON (ICIS)--Chemical industry players are looking anxiously ahead at this weekend's Greek elections, which they view as a watershed.

If voters elect a radical government and Greece exits the eurozone, the debt crisis will deepen, bringing a long period of stagnation to Europe.

Major producers expressed concern over the possibility of another prolonged period of uncertainty, slowing demand and increasing feedstock costs. Most players complained that it has become extremely difficult to make predictions and to forecast even for shorter periods, which is making life difficult.

According to chemical industry group Cefic on Thursday, the EU debt crisis will weigh down European chemicals sector production more than initially forecast, predicting a standstill in EU chemicals output in 2012 after a relatively weak 1.3 per cent increase in 2011.

“Domestic demand for chemicals will decline slightly as compared with 2011 as austerity measures in EU member states dampen business orders and inventory build-up remains flat, due to continued weak EU business sentiment," Cefic Director General Hubert Mandery said.

Since January, feedstock costs, such as benzene and butadiene (BD) have been on a rollercoaster ride - one month increasing, another month decreasing - leaving derivative producers baffled and uncertain of what to expect next.

For example, in February, benzene was at €979/tonne ($1,224/tonne), up by €119/tonne from January, but went down by €52/tonne in March. In April it was at €890/tonne, down by €37/tonne from March. However, in May its price went up by €58/tonne and another €73/tonne in June to €1,021/tonne.

Most players downstream from benzene are now hoping for a major correction in its price because they are being squeezed between high feedstock costs and low derivative demand.

Among others, bisphenol A (BPA) and epoxy resins makers are desperate to increase prices to recover margins, but on the contrary, they are often forced to give discounts to maintain sales volumes and to keep Asian competitors out of Europe.

"I would like to lower prices to encourage my consumers to buy more, but I simply cannot afford to do so," said an epoxy resins producer.

Since chemical companies supply the construction and automotive industries, the most important drivers of Europe's economy, a slowdown in output in these sectors can have a negative effect on chemical suppliers.

Epoxy resins demand is about 20-30% down in June, depending on source, compared with the same period last year, sources said. Epoxy resins are used in the automotive, wind energy and construction industries.

Tyre sales, a major end-user market for styrene butadiene rubber (SBR) production, are also significantly lower this year than last. Truck tyre sales were down by 28-45% in May, southern Europe being the high end of the range. Passenger and small vehicle tyre sales have fallen by about 10-15% during the same period, tyre producers said.

New car registrations, industrial and construction output is forecast to fall in 2012.

According to latest data by Eurostat, the European statistics office, construction output in March 2012 decreased by 3.8% in the euro area and by 3.9% in the EU27 compared with March 2011.

The construction sector is one of the chemical industry’s key downstream markets and uses a wide variety of products, including plastics and adhesives.

Industrial production dropped by 2.3% in the euro area and by 1.7% in the EU27 in April 2012 compared with April 2011.

In addition, in the first four months of 2012, new registrations for cars in the EU fell by 7.5% year on year to 4,332,342, down from 4,682,703 in 2011.

Suppliers to these industries fear that if this tendency is here to stay, the situation will become unsustainable in the longer term.

And because not only governments, but high street consumers alike are cutting back expenditure, there is little scope for improvement this year.

Because banks don't give as many loans as they used to and sales are down, some end-users have been delaying payment and cashflow has become a real problem, one trader said.

When the last financial crisis hit, European governments cut taxes, such as the value added tax (VAT), and started special incentives funded by the taxpayer to encourage consumers to spend. These programmes helped people exchange their old cars for new ones, to buy new, energy efficient windows, or to insulate their houses, all of which helped increase chemical output.

But because this time around many governments are in trouble themselves and are in danger of going bankrupt, they will not be able to step in with new incentives to help drive consumption up. This will likely send some chemical producers to the brink of collapse, a number of sources said.

In light of this, a large number of players are concerned that recent developments in the financial and political world in Europe can have a seriously negative impact on the chemical industry.

"If the crisis hits, governments won't be able to step in and help out ailing firms with incentives, so this time around it will hit much harder than three years ago," an SBR producer said.

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($1 = €0.79)

By: Janos Gal
+44 208 652 3214

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