INSIGHT: Poor demand, low operating rates threaten difficult 2013

14 November 2012 16:17  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--There is so much focus on cost currently that sight is sometimes lost of market demand. Of course, the two go hand in hand and each helps drive profitability, but chemical sector players find themselves in a particularly difficult position towards the 2012 year end.

Little, no, or even negative demand growth in important product markets in North America, Europe and China, gives producers hardly any room to move. Some executives are proud that their companies are able to run capacity at increasingly low operating rates and still make a profit but one questions whether they should be.

If businesses are not growing – and a production plant is operating well below optimal profit generating capacity - then they are vulnerable. When does market discipline break, for instance, and oil price volatility persuade players to drop prices in order to gain market share?

Pricing discipline has underpinned profitability in 2012 but if it is lost then the prospects for 2013 are not good.

Weak demand and low capacity utilisation rates are twin threats to the industry.

Credit rating agency Moody’s changed its 12-18 month outlook for the chemical industry in North America and Europe, the Middle East and Africa (EMEA) to negative this week based on the likely consequences of lower demand growth. The agency’s outlook for the sector in these regions had been stable since September 2011.

“The outlook change reflects Moody's expectation that profitability in the industry will decline in the next 12-18 months because of deteriorating economic conditions in Europe, combined with slowing growth in developing countries and relatively weak US growth,” it said.

European earnings before interest, tax depreciation and amortisation (EBITDA) could fall by close to 10% in the next 12 months, Moody’s added. It expects earnings in North America to be down by mid-single digits on average because of only slow economic growth in the US. Weaker industrial growth in China and in other developing economies will exacerbate the slowdown in Europe.

The forecasts are based on GDP projections which the agency has revised downwards from earlier this year. US GDP growth for 2013 is put now at 1.5% to 2.5% (from 2% to 3% forecast in August). The GDP range for Europe in 2013 is -0.5% to 0.5% (from 0.5% to 1.5%). It is likely to be 2014 before even modest improvements are made in global GDP, Moody’s says.

The impact of slower growth will be felt by all chemical companies but particularly those that serve industrial markets. Weak construction, automotive and electronics markets pose problems for many chemical players.

Demand is weak for products such as styrene, butyl rubbers, PVC (polyvinyl chloride) (in Europe), epoxy resins and PET (polyethylene terephthalate) for bottles and fibres. Reduced demand for titanium dioxide is putting pressure on supplier margins because operating rates and prices have had to be cut.

Moody’s thinks that growth will continue in some more consumer-oriented segments which include chemicals for agriculture, nutrition and medical applications. “This will support the performance of speciality producers, such as Sigma Aldrich and Albemarle," it suggests, as well as that of more diversified chemical industry players such as DuPont, Bayer, DSM, FMC, Syngenta and Evonik Industries.

The ratings agency says that if its GDP projections for the G-20 nations improve, and if Europe stops contracting, then its chemicals outlook could be lifted to stable.

But that would only mean that EBITDA growth of the industry might be flat or “modestly positive” – less than 5%.

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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