Commentary: Global chemical outlook muddled by conflicting forces

13 July 2012 10:04  [Source: ICB]

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The US central bank is the missing link for looser monetary policy that could spur a major rally in equity markets and commodity prices. Meanwhile, Q2 earnings season will be ugly

There is a confluence of opposing forces at work in the global macroeconomic picture, making this time particularly uncertain for buyers and sellers of chemicals. The unleashing of cheap money in the eurozone and China, and a new £50bn ($77bn, €63bn) round of quantitative easing (QE2) in the UK are fighting weak economies in Europe, a continuing slowdown in China and a US economy that could be tipping towards another recession.

Given the structural problems of high debt levels in Europe and increasingly weak economic data in the US, the global markets shrugged off the simultaneous, but apparently non-coordinated, efforts of three major central banks - in China, the UK and Brussels (European Central Bank) - to loosen monetary policy on July 5.

Stock markets languished and crude oil failed to rally above the mid-$80s/bbl on the New York Mercantile Exchange. Even gold prices continued their descent below $1,600/ounce after the briefest of spikes, signaling not a whiff of inflation.

In an environment where economic stagnation appears to be sinking in on all fronts, much more will be needed to juice the bulls.

There are two keys to any major rebound in equity and commodity prices from here until the end of the year - another big round of quantitative easing from the US Federal Reserve, and a backing off of yields on Spain's sovereign bonds, which are near levels where it will be impossible to repay that debt.

With the European Central Bank apparently unwilling to buy up more sovereign debt to add to its burgeoning balance sheet, Spain's bond yields may be left twisting in the wind. So let us focus on the US.

WAITING FOR THE US FED

Everyone is waiting for the US central bank to start another major money-printing operation to flood the US and global economies with more dollars. While it is debatable if this is sound long-term monetary policy, in a period of low inflation and high unemployment, there is little holding the Fed back.

And the looming US fiscal cliff on January 1, 2013 - where automatic massive spending cuts and tax hikes kick in unless Congress and the president act to avert this scenario - is already causing a great deal of uncertainty among businesses.

Most major governments are loosening monetary policy to counter economic slowdowns. Now it is time for the US central bank to act. Absent any move, there is no reason to expect that the US economy will not follow its leading economic indicators all the way down.

ISM PMI POINTS DOWN

One such premier leading economic indicator - the ISM Manufacturing Purchasing Managers Index (PMI) - dipped into negative territory for the first time since July 2009 with a June 2012 reading of 49.7%. Anything above 50% indicates expansion, while below 50% indicates contraction. The PMI fell a sharp 3.8 percentage points from May's reading of 53.5%.

The ISM's New Orders Index also plunged 12.3 percentage points to 47.8%, the first contraction since April 2009, when the US economy started crawling out of a massive pit.

Meanwhile, Wall Street is expecting an ugly second-quarter earnings season for the chemical group, with many analysts having already slashed estimates and others trimming numbers last week. Guidance on second-half performance is likely to be tepid at best.

TIO2 FALTERS

Titanium dioxide (TiO2), the last bastion of pricing strength in the chemical group, is now showing serious weakness for the first time in many years. Europe prices fell by €0.10-0.20/kg to €3.00-3.20/kg in July, while in North America, third-quarter contract prices rolled over at $2.00-2.12/lb, marking producers' first failed price increase in three years.

On July 11, Frank Mitsch, analyst with US-based investment bank Wells Fargo, cut his second-quarter earnings per share estimate on US-based TiO2 producer Kronos from $0.80 to $0.50, his 2012 forecast from $3.10 to $2.50, and his 2013 number from $2.80 to $2.30.

Additional reporting by Joe Kamalick in Washington, D.C., Janos Gal in London and Larry Terry in Houston


By: Joseph Chang
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