OUTLOOK '13: A bleak midwinter for Europe chemicals

02 January 2013 13:30  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The prospect of weak economic growth hangs heavy over the European chemicals sector at the turn of the year.

Domestic demand has been under pressure for months and the outlook has worsened. What optimism there was faded towards the 2012 year end.

EU chemicals output is expected to contract in 2012 and be close to 8% below its pre-recession peak. Export demand has slowed as the world’s major economies and the important growth markets for chemicals have stuttered.

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

His remarks were made as the trade group lowered its chemicals production forecasts for the European industry.

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

EU chemicals output has suffered as the region’s industries and its construction sector struggle with weak demand and the overhang of the sovereign debt crisis. The prolongation of talks on the crisis and the lack of swift action have probably extended an otherwise extremely difficult period of economic stagnation.

“EU automotive and construction segments have been a drag on chemicals demand in 2012, offering few encouraging signs,” Cefic said. “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 said that it expects EU chemicals output, excluding pharmaceuticals, to contract by 2.0% in 2012 and it could only optimistically project growth of 0.5% in 2013. The outlook is based on the assumption that output will rise every quarter in 2013, having fallen in the fourth quarter of 2012.

Petrochemicals and polymers production and demand are closely linked to industrial production and ultimately to GDP growth. When times are good, the sector can grow fast but when manufacturing, particularly, comes under pressure so chemical producers are hard pressed to maintain operating rates.

The strong desire, currently, to hold less stocks and manage inventories more cost-effectively – a necessity in such uncertain and volatile financial times – means that chemical manufacturers both physically and financially have less room to manoeuvre.

The most recent official European statistics highlight the industry’s dilemma.

EU chemicals production growth was just 1.1% in October and was down 0.2% year on year. These numbers looked better than those for September and there was some comfort to be had from the indication that the apparent rate of decline had reversed from earlier, months.

The broader, EU industrial production (IP) data, however, showed continued sharp output declines in manufacturing industry from month to month and year to year.

Europe is a long way from curing its economic and industrial headaches, let alone its deep financial problems.

Of concern running into 2013 has to be that the powerhouse of the European chemical industry, Germany, currently, is under intense pressure.

The Bundesbank, in December, cut its 2013 GDP growth forecast for Germany to 0.4% from 1.6% previously because of the ongoing weakness in the eurozone and the slowing world economy.

“The cyclical outlook for the German economy has dimmed,” it said.

The bank predicted GDP growth of 0.7% for Germany in 2012 but encouragingly suggested that the slowdown was likely only to be short-lived.

Munich-based economics research institute, Ifo, was more optimistic predicting 0.7% economic growth Germany in 2013. “Domestic upward forces and rising demand for German export goods from outside the EU should boost the economy” in 2013, it said. Germany’s production was expected to remain stagnant through the 2012/13 winter months.

“However, from today’s standpoint, Germany does not look set to slip into an outright recession,” the institute said. It also pointed to November's improvement in its business climate index.

Germany’s GDP growth was boosted by international trade in 2012, although impulses clearly weakened in recent months, the institute said.

Germany’s chemicals production is expected to grow by 1.5% in 2013, after a 3.0% year-on-year decline in 2012, believes the country’s chemical industry association VCI said.

While there is little positive economic news for Europe there is some encouragement for industry to be had from the possible stirring of growth and business sentiment in some parts of the world.

The US has its own, major, fiscal problems running up to the year end. There are some signs however, that economic sentiment in China might be improving.

Given the size of the China market and its latent demand for chemical imports this one of the few bright lights in an otherwise gloomy outlook.

“Dynamic growth has been fleeting this year, especially in China and in other emerging markets,” the American Chemistry Council (ACC) said in mid-December in its year-end situation and outlook report for 2012.

“In Europe, a crisis turned into an outright recession, which at the close of 2012 still shows no signs of abating,” it added. “In the United States a typical business cycle recovery has yet to emerge in many sectors. Although US GDP surpassed its pre-recession peak, growth has been painfully slow in 2011 and 2012.”

The ACC is not alone in believing that the recession in Europe continues to present one of the greatest risks to the world economy, as does concern over a hard landing in China.

Growth in the $5,000bn (€3,800bn) chemicals business stalled in 2012 under the stress of both factors with output, according to the trade association, growing by just 1.2% compared with the 4.5% volume gain in 2011.

It is predicting that chemicals output will increase by 3.6% in 2013 before economic recovery takes hold. It projection for Europe is for growth in chemicals output, including pharmaceuticals, of 0.9% in 2013.

HSBC, picked up on the the growth factor in an investor update on European chemicals published towards the 2012 year end.

On the positive side, it noted that purchasing managers’ indices in Asia, particularly in China, and in North America, had just moved above 50 and thus were signalling an improving economic situation.

The bank was also encouraged by the fact that some politicians appeared committed to taking steps to stimulate growth in 2013.

Europe is expected to remain stubbornly in recession, however, although it was recognised that its industries, chemicals included, can benefit from renewed growth elsewhere.

HSBC’s economist say that the global economic picture remains very uncertain.

In Europe, for instance, the contraction in business has slowed but employment continues to fall.

In the US, manufacturing activity fell in November but some of this must have to do with the impact of Hurricane Sandy.

All-in-all the main risk going into 2013 is seen as a drop in US economic activity which has the potential to derail the “fragile stabilisation” seen in world trade.

Unfortunately, European chemical companies do not appear yet to be benefitting from any of the improvements sensed in the macroeconomic environment.

Fourth quarter projections from Europe’s chemical producers have been circumspect at best, but many have said that they expect demand to remain weak in the fourth quarter of 2012 and into the first quarter of 2013.

Some are not holding out much prospect of growth in the seasonally stronger second quarter in 2013.

($1 = €0.76)

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



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