INSIGHT: European chemicals hobbled by slow growth

10 December 2012 17:36  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--European chemical industry growth stalled earlier this year and has since contracted. The prospects for 2013 are not good.

“The EU chemicals sector faces increasing uncertainty as the domestic market continues to struggle and overseas competition remains relentless,” Cefic president Kurt Bock said on Friday.

“The current EU economic downturn is weighing down on the chemical industry in Europe at a time when other world regions also face challenges,” he added.

Clearly, EU chemical producers are suffering from the decline in domestic European demand, and weakness in emerging markets has hit them hard.

Tellingly, EU chemicals production this year is expected to be 8% below pre-recession levels.

“EU automotive and construction segments have been a drag on chemicals demand in 2012, offering few encouraging signs,” the trade group said in its latest chemicals sector forecast.

“Sluggish demand remains for new cars as government-backed incentives to replace vehicles have now run their course. The fall-out from overcapacity in the construction market has yet to wind down as the European building sector remains at historically low levels.”

Cefic has revised down its September forecasts and says now that EU chemicals output, excluding pharmaceuticals will contract by 2.0% in 2012.

It forecasts only a slight increase in output in 2013, of 0.5%, but even that is based on the optimistic assumption that output will rise every quarter next year, having fallen in the fourth quarter of 2012.

Not surprisingly, petrochemicals are under great pressure with demand weak and businesses burdened by high naphtha costs. Customers and producers have tried to optimise inventory levels to manage poor demand and high costs.

Cefic said that only consumer chemicals will avoid a fall in 2012 while suggesting that the output from this sub-sector will climb by 1.0% in 2013. Consumers regularly spend on the household and personal care products that use such chemicals while they cut back on other expenditures.

The difficult operating environment hardly augurs well for the future and analysts for HSBC suggested on Monday that it will start to hit EU chemical company shares in 2013.

“There is little value left in the sector over the next 12 months,” the bank warned investors.

By its calculations, industrial production (IP) globally will have to rise by a massive 12% in 2013 to continue to maintain EU chemical sector share price differentials.

Chemical company stocks have performed remarkably well in 2012. “Like Icarus, the European chemical sector has been flying this year, outperforming the European market by 12%, US chemicals by 11% and Asian chemicals by 27%,” HSBC said.

“The questions investors are now faced with are: like Icarus, has the sector flown too close to the sun and how much economic growth do we need in 2013 to sustain the current altitude?” it added.

“We believe that in the current economic environment – low growth – the sector is already pricing in the pick-up in earnings momentum needed over the next 12 months to justify paying the current premium to long-term average multiples.”

Most producers are exposed, particularly those operating in commodity chemical or polymer businesses and those less able to export. European chemical producers have been forced in recent years to focus more on specialties and on customer service and this has militated against the worst effects of cyclicality.

The benefits have been reflected in share price outperformance but it is questionable now how much longer prices can hold relative to the market, given the industry’s exposure to Europe’s much weakened industrial performance.

Read Paul Hodges’ Chemicals and the Economy blog
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By: Nigel Davis
+44 20 8652 3214

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