INSIGHT: Europe’s economic stagnation has global impact

27 December 2012 15:53  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--A global polyolefins producer is said to be shipping greater volumes of polyethylene (PE) from the US to Europe because of the shale gas-derived feedstock advantage in North America.

Europe’s weaker position on ethylene derivatives in general is also being compounded by an exceptionally gloomy macro-economic outlook. Borealis CEO Market Garrett gave, quite probably, an accurate view on Europe when, in November, he warned of a 10-year-period of economic stagnation.

So where does the European petrochemical industry go from here? How much longer can it carry on running crackers at what ICIS blogger Paul Hodges said were “recession levels” in a 29 November post?

As the chart below shows, based on data from the Association of Petrochemicals Producers in Europe (APPE), third quarter operating rates were at 80%, the same as in the first half.

Europe ethylene production

“The only silver lining continues to be that refineries are also suffering, and their low operating rates mean there is no surplus naphtha production to push down olefin margins,” Hodges wrote, in the same post.

“Equally, the increased use of ethane feed in the US due to shale gas provides good support for co-product propylene and butadiene.

“Overall therefore, European margins and profitability remain much stronger than could otherwise be expected.

“But as the old saying goes 'if something is too good to be true, it usually is'. Europe's leaders are running out of time to begin solving the challenges they face.”

John Mauldin, the author, economist and financial writer, described the political challenges facing Europe in 2013, when he wrote in a 20 December newsletter: “They (Europe) have a monetary union which is artificial, and it keeps the peripheral nations from adjusting the value of their trade.

“Italy, Spain, Greece... they are on a type of gold standard called the euro, and so there is trade imbalance - and then you get banking imbalances and then the governments are running deficits - so it all combines.”

He warned that solving any of the above problems would require solving all three, at a cost of trillions of Euros.

Depression in southern Europe would create major difficulties for Germany as 40% of its GDP is derived from exports, half of which are shipped to Europe, he added.

“When their clients and their trading partners go into depression, it's going to create recessions and all sorts of political anxiety and economic anxiety in Germany.”

The focus in 2012 was on Greece; next year, it could shift to Spain, which, according to Mauldin, will have to eventually default on its debt.

“They're going to have to ask for help, and they're going to look for all sorts of things to call the restructuring - something other than the word ‘default,’ but it's mathematical,” he added, in the same newsletter.

“They just simply can't pay for it. They're going to have to have major reformation. Mariano Rajoy (the Spanish Prime Minister) is really in deep trouble because he has no easy solutions.”

Europe’s crisis went global a long time ago.

"At the Canton Fair, China's largest trade fair, held in the southern city of Guangzhou last month, export orders were 17.5% lower than a year earlier,” said The Economist in a 15 December article.

"Official figures show that (China’s) exports to the European Union have fallen by an astonishing 18% over the past year. Europe's chronic failure to resolve its crisis continues to cast a pall on China's prospects."

And Mauldin said, again in the same newsletter: “Everything is connected. One of the things that we don't think about is how important European banks are to world trade - especially the French banks.

“They finance a great deal of world trade. They finance a lot of the trade that our country uses when they go internationally. All of these things are connected, and we have to find new ways to do things.”

France faces unemployment at 10.2% and a debt-to-GDP ratio of 89.2%.

There are a myriad of other macro-economic problems.

The US needs to first get beyond the looming fiscal cliff, and then find longer-term solutions to its budget deficit.

Earlier this month, Dow Chemical CEO Andrew Liveris warned that macro-economic problems would lead to several years of lower growth in the US, Europe and in China – previously, everyone’s “get out of jail” card. China is struggling to adjust its growth model from one of investment to domestic consumption.

As Europe cannot be viewed in isolation, a more relevant question might therefore be, “Where does the global petrochemical industry go from here?”

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

By: John Richardson
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