Commentary: Grim Europe outlook

26 April 2013 12:48  [Source: ICB]

April has not been a happy month for Europe's chemical industry, as a flurry of plant closures and job cut announcements further sapped confidence from a sector already buffeted by global market trends largely out of its control and a regional economy still in the depths of recession.

Europe globe Rex Features

Rex Features

The region faces many short- and long-term challenges

On top of the 1,050 European job cuts and capacity reductions announced by Saudi Arabia's SABIC this month (see page 9), there have been further reductions made public by BASF and Finland's Kemira, bringing the total to at least 1,600. BASF said it is going to restructure its performance products operations, with most of the job cuts occurring in Basel, Switzerland. Kemira is to close a facility at Vaasa, Finland, with the loss of 60 jobs.

These cuts are just the most visible, public display of a regional business that is having to deal with both short- and long-term challenges. Europe's economy is still in a shambles, with some countries in deep recession and even mighty Germany heading that way if investor George Soros is to be believed.

Markit's Flash Purchasing Managers' Composite Index for April indicates that the eurozone area's economic downturn is likely to get even worse in the coming months.

Poor economic growth in China and Asia and a hesitant recovery in the US are also affecting Europe's ability to export itself back to health.

With key end-use markets such as automotive and construction in steep decline, it is no wonder companies such as German rubber chemicals producer LANXESS are suffering in their local markets. It recently warned of a steep decline in Q1 profits.

Quite apart from its near-term macroeconomic problems, Europe also faces more permanent structural issues such as its ageing population - who may consume less - and an increasingly competitive US chemical sector, buoyed by cheap shale-based ethane feedstocks.

CHEMICAL MARKET JITTERY

With so much bad news about, Europe's chemical markets have become extremely nervous, in tandem with oil and other commodity markets. The oil price collapse from $111 (Brent) at the start of April to below $98 seems to have stabilised somewhat. But fundamental weakness in demand and an expectation of further falls in feedstock prices have caused some markets to more or less seize up.

European ethylene and propylene spot market activity is very subdued as buyers hold back in the expectation that May contracts will fall.

Underlying demand for ethylene and propylene is soft, particularly from its key derivatives polyethylene (PE) and polypropylene (PP), and weakening feedstock naphtha prices have reduced consumption to the minimum levels needed.

Meanwhile, one acetone trader said on 18 April that it had been the worst week of the year for product selling into the solvents market. Participants said that lowering prices had not helped to shift product because underlying demand was so weak.

The situation in Asia is not much better in some markets. Spot acrylonitrile-butadiene-styrene (ABS) prices are expected to continue falling as demand in Europe and the US remains weak for Asian-made goods such as electrical appliances and consumer electronics.

  • Additional reporting by Nel Weddle and Julia Meehan in London, and Clive Ong in Singapore

By: Will Beacham
+44 20 8652 3214



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