INSIGHT: Business sentiment weakens as China growth questioned

31 August 2012 16:16  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Weaker manufacturing output in Europe, the US and in China is squeezing chemicals volume demand while inventories are rising, manufacturing surveys and data show.

The outlook, for the next three months at least, is far from encouraging even though the chemicals numbers recently have looked better than those for most other sectors.

Germany’s Ifo Business Climate Index continued to fall in August although the decline was weaker than last month.

“The current business situation deteriorated only slightly, but companies expressed greater pessimism regarding future business developments. The German economy continues to falter,” The Munich based CESifo economic research group said.

The business climate in manufacturing brightened again, it added, after three successive monthly declines, but business expectations continued to deteriorate.

Particularly worrying is the fact that expectations for exports are negative for the first time in almost three years.

This must be because of the weakened manufacturing climate in China and the continued relatively weak performance of the US economy.

Analysts at Bernstein research on Friday, while looking specifically at chemicals, noted that leading indicators such as the Ifo chemicals survey and the US and Chinese purchasing managers indexes (PMIs) “show the environment deteriorating into Q3 [the third quarter]”.

“The chemicals Ifo survey shows expectations for business activity in the next six months to be worse than in the last survey,” they added. PMIs from the US and China for July point to a continued slowdown in manufacturing in both countries. The US PMI survey shows that the chemical industry contracted in July.

Looking at the latest industry statistics, chemicals sector volumes in the US in July were down only slightly month on month but up 5% year on year.

The slowdown in Europe has also eased with a slight (-0.6%) month-on-month contraction and a year-on-year decline of 2% against a 3% decline in May.

Bernstein makes the point that all its volume growth references are made on a three month moving average basis.

Chemicals has been one of the few sectors in Europe to continue its recovery despite the general economic slowdown.

The EU said at the beginning of July, for instance, that the highest growth of production across industries in Europe in the three months to May 2012 were shown by chemicals, other transport equipment, paper, pharmaceuticals, machinery and equipment.

The EU industrial new orders data for three months to April 2012 showed that most sectors were weakening year on year and only chemicals (+1.4%) and the automotive sector (+0.6%) registered an increase.

The most significant declines were in transport equipment (-11%), machinery and equipment (-6.9%) and textiles (-6.2%).

But the data have yet to catch up with weakened manufacturing industry sentiment in China and the falling off in demand growth for chemicals.

Chemicals may be a sector that reflects changes in the macroeconomic environment earlier than most, but the EU production and new order data have yet to register the slowdown seen from mid year.

The Ifo chemicals survey shows that orders in hand for chemicals are low and down month on month, Bernstein highlights.

It also notes that chemicals production activity in Germany (Europe’s largest producer of chemicals) is expected to be “roughly flat” in the next three months while capacity utilisation remains low.

Not low enough, however, it seems, because inventories, while not increased month on month, are thought to be too high.

Upstream, chemical producers in Europe continue to try to claw back margins by pushing contract prices higher – against the backdrop of higher naphtha feedstock costs. In other regions, petrochemical makers may not be as exposed to the oil barrel but they are to still weak industrial demand, an only slowly recovering US housing sector and deep concerns about the rate of China’s economic and industrial growth.

Having relied on China for so long to stoke the engines of growth, chemicals makers do not relish the prospect of further China growth uncertainty.

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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