INSIGHT: Demand is fragile in uncertain economic environment

29 January 2013 17:07  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Europe’s chemical producers are likely to struggle this year to lift prices and build margins against the backdrop of weak demand and slow growth.

Chemicals output is expected to increase only marginally after falling sharply in 2012 and the battle is on to maintain profitability in a relatively high naphtha feedstock cost environment.

Olefins producers at the end of January have been hard pressed to achieve a rollover in ethylene and a marginal increase in the monthly propylene contract price.

Downstream from the crackers, polyolefins demand is not strong and producers are pushing for price increases having clawed back some margin in January following the ethylene rollover and the drop in the PP January monthly contract price.

Polyethylene and polypropylene producers are seeking price increases of around 4% in February following the olefins settlements. The upstream prices have not been set on market fundamentals, ICIS reported on Tuesday, but on reduced output, both planned and unplanned in Europe and the Middle East.

Polyethylene buyers can’t see prices increasing because of the ethylene rollover.

The Europeans are in a fix with naphtha prices relatively high and demand subdued in the weak macroeconomic environment. They are also mindful of the fact that they are vulnerable to imports, given Europe’s high cost position and the sluggishness of markets in China ahead of the Lunar New Year which in 2013 falls on 10 February.

Producers had hoped for a better January with price hikes built on the assumption that 2013 would follow the early year pattern seen in 2012. However, they knew by mid-month that achieving increases would be difficult.

PE and PP are widely used in food as well as non-food packaging and in agriculture so can show some resilience in the face of slower economic growth. Their use in construction, however, has been hit hard by the slump in this sector in the major European economies.

Indeed, it is the slump in construction and in the automobile industry that has hit chemical producers hard since the 2008-09 crash.

The stimulus programmes governments put in place from 2009 helped lift vehicle demand and buoy output but the shrinkage since their removal has been significant.

The latest data on commercial vehicles also illustrate the extent of the slowdown last year with December demand for new commercial vehicle registrations in the EU dropping by 23.4% to the lowest level since October 2009.

Downturns in major markets ranged from -15.5% in the UK to -20.3% in Italy, -21.3% in France, -24.7% in Germany and -34.2% in Spain.

According to the European Automobile Manufacturers’ Association (ACEA) the drop in commercial vehicle registrations in the EU in 2012 was 12.4%.

The drop in demand for vehicles, and in the construction and other sectors of the EU economies in 2012 had a profound effect on chemicals.

Cefic in December forecast that European chemicals would contract by 2.0% in 2012 compared to 2011 and expand by just 0.3% in 2013. The trade group had slashed its numbers from an earlier, September 2012 forecast for chemicals output contraction of 1.5% in 2012 and an increase in production of 1% in 2013.

The current demand situation for chemicals in Europe is clouded, possibly to a greater extent than usual, by seasonal factors.

acetoneAcetone demand, for instance, usually picks up at this time of year as buyers in the methyl methacrylate (MMA) business and in solvents build stocks for use in paints and coatings ahead of seasonal demand for those products later in the year. Acetone prices tend to cycle towards a second quarter peak, as the chart shows.

But in 2013, the supply/demand balance for the phenol co-product is particularly tight due to lack of material in the market. Poor phenol demand is crimping acetone production and pushing acetone spot prices to unusually high levels.

The phenol demand picture is driven by the demand for polycarbonate and epoxy resins, both of which are derivatives of bis phenol A. Demand for these products is driven largely by their use in construction and, in the case on polycarbonate, increasingly in the automobile industry.

The record-high cost of major phenol/acetone feedstock benzene is seen to be a main factor in the demise of downstream demand as phenol derivative markets struggle to pass on production costs.

But market participants are, perhaps unsurprisingly, arguing about whether the phenol situation is being driven by high priced benzene – and subsequently high priced phenol – or by poor demand.

 “It’s simply demand and the economic situation,” a major buyer of phenol for the BPA market suggested to ICIS. “I’m not so sure demand will come back if benzene falls. It’s the world economy; it’s not as simple as just benzene.”

This lack of confidence in demand, or lack of confidence in the future, riddles most chemical markets. And there is deep concern that if demand did not get better in January, it might not improve in February or March. By then, some players could be in big trouble.

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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