INSIGHT: As key markets contract, chemicals feel the squeeze

01 October 2012 16:30  [Source: ICIS news]

By Nigel Davis

A Peugeot production line in FranceLONDON (ICIS)--Major petrochemical monthly contract prices in Europe have tracked down for October, largely reflecting lower, although fluctuating, naphtha feedstock costs. But what is not apparent from the numbers, upstream at least, is the current pressure on demand.

That is largely negative as chemical end-use markets struggle against the backdrop of Europe’s miserable economic performance. Europe’s manufacturing industries are finding the going tough to say the least. The construction sector is mired in the downturn.

And for European chemicals a downturn it is. The trade federation Cefic reckons that European chemicals output will contract by 1.5% this year. It has already revised downwards its June prediction of flat chemicals output growth in 2012.

Of possibly greater concern is that it expects chemicals output in 2013 to increase by only 1%.

EU 27 nation GDP was down in the second quarter, reflecting the worsening trans-national economic situation exacerbated by the sovereign debt crisis.

And these are Cefic director general, Hubert Mandery’s comments from a speech made to the federation’s 2012 general assembly:

“It appears that important overseas markets will not provide additional help for the EU economic recovery,” he said on Friday 28 September.

“Sluggish growth in the US market, and the upcoming election there, could prolong uncertainty. Emerging market Brazil is in a difficult period as slower output growth from 2011 extended into 2012; China and India have not been immune too. Both show signs of cooling.”

EU chemicals players have been adept at tapping export markets when times at home got tough but that avenue to growth is narrowing. Europe continues to lose market share in emerging markets and its slice of the global chemicals sales pie has shrunk from 36% to 19.6% over a 20-year period.

So hanging on to prices is one thing. Hanging on to market share, clearly another.

Market sentiment this year has swung from month to month although it has tended to worsen. July clearly was weak in petrochemical markets but August appears not to have been as bad as many expected.

Downstream in petrochemicals and polymers, however, it does feel worse. Fourth quarter demand for some products is expected to be 15-20% down even on last year’s weak fourth quarter, while producers are trying to push through price increases to compensate for higher priced upstream petrochemical raw materials bought earlier.

We appear to be in a situation similar to a year ago when the end of year slowdown came early. Chemical product sales are down in response to lower sales in important end-use markets.

Take automobiles as an example.

Western Europe light vehicle sales could be down as much as 8.0% in 2012, compared with global sector growth of 4.4%, Moody’s said on 17 September. The debt rating agency’s global forecast is unchanged from January but the European outlook is worse than the earlier estimated contraction of 6.2%.

This is because the outlook for sales in southern Europe and Italy has changed so dramatically from the beginning of the year. Light vehicle sales in Italy are now expected to be down around 20% in 2012, Moody’s says, while sales in Spain might fall by 11%.

The sharp western Europe slowdown in 2012 is expected to help drive down global light vehicle sales growth in 2013 to 2.9% from an earlier estimate of 4.5%.

The sharp slowdown in southern Europe will hit many auto makers but particularly those that do not produce premium models that sell outside western Europe.

“In 2013, we expect western European light vehicle demand to contract again for what will be the sixth consecutive year,” Moody’s says in its report.

“We forecast demand to be down 3% on 2012 compared with our January forecast of 3% growth, which was based on a mild economic recovery boosting demand. We now forecast euro area GDP growth of just 0.5-1.5% in 2013. Because of the unresolved euro area sovereign debt crisis, which could trigger a deeper and longer recession in the region, there is a significant downside risk to this GDP forecast.”

There have been some production cutbacks by auto makers in Europe but a wave of plant closures similar to those seen in the US would benefit sector players, Moody’s suggests.

US-headquartered producers, particularly, are frustrated by the losses they are incurring on their West European businesses. The impact of plant closures rather than simply production cutbacks will be hard felt through the different auto supply chains.

The value of chemicals used in light vehicles in the US has been estimated by the American Chemistry Council (ACC) at almost $3,300 (€2,574) per unit in 2010. Moody’s estimates that 13.19m units will be manufactured in western Europe in 2012, down from 14.34m units in 2011.

It expects light vehicle sales in the US to grow by 9.8% this year to 14m from 12.75m units in 2011.

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

($1 = €0.78)

By: Nigel Davis
+44 20 8652 3214

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