OUTLOOK '13: Outside factors to shape future of Europe chem firms

04 January 2013 10:58  [Source: ICIS news]

By Franco Capaldo

LONDON (ICIS)--In most cases, a new year brings with it opportunity for companies to start again, to make up for any shortfalls made over the past 12 months. The problem is, as much as the chemical industry will look forward to a fresh canvas, powers outside its control have already chosen the colours.

And the economy provides a very grey backdrop indeed. Although it’s been more a mixed bag than an empty one for European chemical companies in 2012, a turnaround in the industry’s prospects for the new year seems well out of reach. The consensus plan will be to survive 2013 and pray for things to get better in the run up to 2014.

Activity levels in the European chemical industry have been severely impacted by the sovereign debt crisis in Europe, while falling consumer confidence and turbulent oil prices have caused more volatility. This situation is unlikely to change drastically in 2013.

According to the Organisation for Economic Co-operation and Development’s (OECD's) latest global outlook, eurozone GDP is likely to contract by 0.1% next year before expanding by 1.3% in 2014 as part of a “hesitant” global economic recovery. The international economic organisation added that a slow global recovery over the next two years is likely to be reversed if the eurozone fails to deal with its ongoing economic crisis.

OECD secretary-general Angel Gurria said: “The world economy is far from being out of the woods ... governments must act decisively, using all the tools at their disposal to turn confidence around and boost growth and jobs, in the US, in Europe, and elsewhere.”

It’s a quote which could have come from many European leaders during the past three years to describe the macroeconomic quagmire the eurozone finds itself in, showing how little progress the region’s policymakers have made in resolving the financial crisis.

European Central Bank (ECB) President Mario Draghi announced the bank has also revised down its eurozone growth forecasts for this year and the next.

The bank expected the eurozone's economy to shrink between 0.4% and 0.6% this year, before economic activity gradually recovers.

The ECB revised down its forecast for economic growth in the eurozone next year to be between minus 0.9% and plus 0.4% and growth of between 0.2% and 2.2% for 2014.

“Over the shorter term, weak activity is expected to extend into next year, reflecting the adverse impact on domestic expenditure of weak consumer and investor sentiment and subdued foreign demand,” Draghi said.

“A gradual recovery should start later in 2013 as our accommodative monetary policy stance and significant improvement in financial market confidence work their way through to private domestic expenditure, and a strengthening of foreign demand should support export growth,” he added.

The European Chemical Industry Council (Cefic) recently slashed its output forecasts for the industry in 2012 and 2013 in Europe on the back of a stagnant economy and weak performances from key end markets. The industry body predicts that European chemicals output will contract by 2.0% in 2012 compared with 2011, and will expand by 0.5% in 2013.

The move represents the association’s latest downgrade of its output forecasts for the European chemicals industry. Cefic predicted in September that industry output would contract by 1.5% in 2012, down from earlier estimates that output would be static year on year, and that output would increase by 1% in 2013.

At the time, Cefic president and BASF CEO Kurt Bock said: “The EU chemicals sector faces increasing uncertainty as the domestic market continues to struggle and overseas competition remains relentless. EU policymakers need to continue to work towards putting Europe on a better economic footing to help us move out of this difficult period.”

It is important to also take into consideration that chemical firms will have to deal with tough comparatives in the first quarter of 2013 compared with the same period of 2012 which saw a strong restocking phase by customers after a year-end inventory wind down in the fourth quarter of 2011.

This, combined with some softening in key-end markets, such as automotive, construction and industrial machinery, means companies will be constrained to providing a ‘wait and see’ outlook.

It is likely European chemical groups will invest outside of Europe and announce further cost cutting measures in the next twelve months. Regions such as Asia and the Middle East will continue to be locations of substantial chemical industry investment, while it is a good bet there will be a spate of ventures into North America to exploit shale gas and lower chemical feedstock costs.

Many of the big chemical producers which dominate, and act as a bellwether for, the European industry, have already put in place such plans.

With expectations of a volatile and insecure chemicals market in 2013, BASF has looked to protect its earnings with the acquisition of US-based biological seed treatment technology provider Becker Underwood from investment firm Norwest Equity Partners (NEP) for $1.02bn (€772m) with the outlook for agrochemicals seemingly healthy. Bock’s Germany-based chemicals major BASF is still aiming for 2012 sales and EBIT before special items to exceed 2011 record levels, despite revising downwards its expectations for the global economy.

“In this challenging environment, we are concentrating on our strengths and expanding our business, but we are also keeping an eye on the costs and are continuing to optimise our business processes,” Bock said in a quarterly earnings announcement.

Other European producers are also following suit.

Earlier in the year, Finland’s Kemira reported it would cut up to 600 jobs as part of a global restructuring programme to improve profitability, lower costs and accelerate growth in emerging markets, while Belgium-based chemicals firm Tessenderlo, which reported a third-quarter net loss, also said its top priority would be the divestment of non-core businesses and acquisitions in growth activities.

Meanwhile, France-based specialty company Arkema will look to divest small non-core businesses, including its tin stabilisers unit, following the divestment of its vinyl business at the beginning of July. Arkema’s CEO Thierry Le Henaff  said the company will continue to focus on expansion in higher growth countries.

Much of the performance of the European chemical industry in 2013 will depend on political leaders creating a stronger, more integrated Europe to improve the competitiveness of its chemicals industry.

Borealis CEO Mark Garrett said in November that due in part to an unwillingness by EU politicians to make substantive structural changes to their economies, Europe has entered a 10-year period of entrenched economic stagnation, akin to that experienced by Japan.

If 2013 is to be a prosperous year, chemical companies will need a stable economy to work in, supported by solid and progressive policy from governments and institutions, so it can do what it does best – driving innovation and job creation.

($1 = €0.77)

By: Franco Capaldo
+44 (0)20 8652 3214

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