INSIGHT: Germany’s exporters exposed to euro and China uncertainties

04 July 2012 16:36  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Germany’s chemical producers would be among the hardest hit from an intensification of the eurozone debt crisis and from slowed economic growth in China.

The International Monetary Fund (IMF) warned this week that the German economy, its banks and industries, are heavily exposed to the euro crisis given the country’s high trade and financial openness.

Trade as a share of GDP was 62% in 2000 but 94% in 2011, the IMF said, “in part reflecting in particular burgeoning Eastern European supply chains and higher exports to emerging Asia”.

The dynamics of Germany’s business cycles are driven largely by foreign shocks, it added.

“Trade linkages with the United States, United Kingdom and emerging Asia are particularly important in transmitting macroeconomic shocks. Trade linkages within the euro area are significant, but the transmission of shocks through this channel is mitigated somewhat by monetary policy stabilisation within the currency union.”

Several conditions are in place in Germany for a domestic demand-led recovery with growth “poised to reach potential in the second half of 2012”, the IMF suggested, but it warned that the outlook “is subject to considerable risks”.

Those risks have clearly been picked up by business executives.

Their confidence, as measured by the Munich-based Ifo Institute, fell in June to its lowest level in more than two years. The institute said that manufacturers were increasingly worried about the near-term business outlook, and particularly about export markets.

And Germany’s chemical industry likes to see itself as a world champion when it comes to exports.

Chemical trade group, the VCI, said at the recent ACHEMA trade fair in Frankfurt, that the country’s chemical exports total in 2011 was valued at €150bn ($190bn). That is well over 11% of the global chemical export market. Germany’s foreign trade surplus in chemicals in 2011 was about €42bn.

Seven factors make particularly important contributions to the continually good position of Germany’s “chemistry” in international competition, according to the VCI.

“Our central role in the network of industries, innovative strength, intensive cooperation with science and the orientation of product strategies to megatrends and sustainability are decisive strong points for our industry," said director general Utz Tillmann in Frankfurt.

“Add to this the diverse Mittelstand of small and mid-sized enterprises, a pragmatic social partnership and the success concept of chemical parks which is increasingly being put into practice also in other countries.”

But current economic risks continue to loom large, as do raw material prices (based on a still high oil price when he spoke) and, in Germany, there is uncertainty over electricity prices, given the government’s stance on nuclear power.

“If electricity costs run wild in Germany for energy-intensive industries such as chemistry or steel – i.e. industries whose products make the energy transition possible in the first place – industry as a whole will be driven towards disaster. However, I am under the impression that both the federal government and the federal states are realising how serious the situation really is,” Tillman said.

Domestic and EU issues aside, however, Germany’s chemical industry must be eyeing developments in China with real concern.

Germany’s chemical producers expect China demand growth to underpin their own in the medium and long term. The largest chemical companies in the world have invested significantly in production facilities in China while exports to China help provide output growth.

“Weaker than ‘normal’ post-crisis domestic demand growth in the West makes for a higher-than-normal sensitivity to global manufacturing demand,” global investment bank Nomura said in an analysis published in November last year, which weighed the prospect of a “hard” landing for China’s economy.

It defined a “hard landing” as “an abrupt slowdown in real GDP growth to an average of 5% y-o-y [year on year] or less over four consecutive quarters". And it suggested that the probability of a hard economic landing starting from before the end of 2014 was one-in-three.

If China’s economic growth, the engine for the manufacturing economy, slows markedly then chemicals will suffer globally.

“Sectors ranging from aerospace through elevators via shipping would be in the front line,” Nomura said in its report.

“Countries like Germany, Sweden and Japan, which have at the aggregate growth level benefited the most from China's capital spending cycle, are most at risk of a substantial fall in growth expectations.”

($1 = €0.79)

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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