INSIGHT: Slowdown grips key markets for chemicals

01 August 2012 16:43  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The world’s largest chemical producers have expressed their concerns about economic growth and chemicals demand in the second half of the year.

Downstream industrial players are also convinced that the demand slowdown witnessed in the second quarter will persist.

The one feeds on the other. Industrial output has slowed and will continue to do so until inter-linked industries and ultimately end-use consumers are more confident in their own ability to spend more.

The depressed economic outlook weighs heavily on multiple markets in the US and in Europe while the slowdown of growth in China heralds a difficult time for exporters.

Output in some sectors could drop to levels not seen since 2009 and the next few months could be particularly difficult.

Chemical consuming industries in Europe, for instance, are talking of extended August closures.

The European automobile market is not expected to return to pre-crisis levels anytime soon, industry executives believe. Capital investments are more likely to be made in dollars than in euros: there is little point investing in a flat or declining market.

US tyre maker Goodyear this week cut its full-year 2012 forecast for volumes following a 9% decline in the second quarter.

CEO Richard Kramer said that tyre volumes now are similar to those seen in the depths of the global financial and economic crisis in 2009.

In April, Goodyear was looking to a 2% year on year decline in volumes. Now it thinks the fall will be more like 5-7%.

Also in April, French tyre maker Michelin reckoned that tyre volumes would remain flat in 2012. Now it forecasts a decline of 3-5%.

Demand is slipping away in a troubling macroeconomic environment and continued uncertainly in Europe. Most executives these days point to Europe as being the focal point of their concerns, because of the potential knock-on impact of the eurozone crisis on financial markets and the major global economies.

China markets have slowed markedly as European business has contracted. Chemical makers in the US are exposed by lacklustre domestic economic growth and the slowdown in exports.

Weaker tyre and automobile markets translate directly into weakened demand for synthetic rubber, plastics, coatings and other materials. Lay that downturn on to still much reduced demand for plastics and chemicals used in construction and the impact of the global slowdown becomes more pronounced.

The slowdown is producing the expected results. Polyethylene demand, for instance has fallen as the slowdown has gripped China’s economy. And ICIS blogger Paul Hodges believes the situation could be worse than some believe.

Data from Global Trade Information Services shows that China’s PE demand was down 1% in the first half of this year compared with the first half of 2011 and down 3% compared with the first half of 2010. Imports were down 9% and exports up 82%, on the same basis.

The figures show that China’s PE imports from the Middle East were up 36% over the same period but down 71% from the EU and down 59% from North America Free Trade Agreement (NAFTA) nations.

“One major learning is that PE demand seems unconnected with GDP. Many commentators have argued that China's PE demand will grow at 1.5x or even 2x GDP. But there is no evidence for this optimism over the past 2 years,” Hodges says.

“Equally, there is little evidence to support US optimism over its ability to export increased PE volumes due to its feedstock cost advantage from shale gas. In fact, the reverse is true, with China's imports from NAFTA down 59% versus 2010.”

Hodges believes that the data provide support for the idea that China's economy is much weaker than official GDP figures suggest.

If that is the case, chemical producers the world over will feel the squeeze on the markets they have come to rely so heavily on in recent years for growth.

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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