INSIGHT: Outlook has to remain cautious in low growth environment

22 May 2013 16:29  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The American Chemistry Council’s Chemical Activity Barometer (CAB) for May showed a slight tick up from April suggesting, the Council says “further economic gains driven by the consumer”.

Good news certainly, and the 10th consecutive monthly gain for the indicator, which has been shown to lead US business cycles by a good margin.

But this is still only lacklustre growth.

“On a year over year basis, the barometer is up 3.1% over May 2012,” The ACC’s chief economist, Kevin Swift, said.

“The growth is slower than it was in the first quarter. There’s a modulation created by continued growth in consumer applications of chemical and plastics products, coupled with a softening of construction-related plastic resins.”

The CAB takes into account a series of chemical industry and other, industry-related indicators, and is presented on a three month moving average basis to help iron out month-to-month volatility. Important components of the CAB for May showed that US chemical production, product prices and inventories were flat, while chemical company share prices rose.

Unfortunately, the picture in Europe is bleaker with the major European economies struggling even to grow. And flat growth is the west is hobbling manufacturing-led economic growth in the powerhouse, certainly for the chemical industry, that is China.

The chemicals data for the 27-member EU take some time to put together and the lagging indicators still show an industry mired in recession. Yet, customer industries are beginning to pick up and even the GDP numbers for the EU and the embattled eurozone have improved month to month in April, some indication of better times ahead, perhaps.

Cefic’s latest Chemicals Trends report, published on 16 May, however, does not make easy reading. It presents EU data for the first two months of the year but no further, and shows that levels of chemicals production in Europe then were still 8.1% below the peak in 2007.

Of deeper concern is that the EU chemical industry confidence indicator (CCI), which is generated by Cefic, fell by 3.5% in April from a negative reading for February.

The CCI, which is an average of production expectations for the three following months, current order book levels and current stock of finished products, worsened for the third consecutive month, Cefic said at the time. “CCI underlying data point to a worsening in assessment of order-book levels,” it added.

EU chemical industry capacity utilisation had fallen to 78.3% of nameplate capacity in the first quarter of 2013 from 78.6% in the fourth quarter of 2012. European producers have been pushing rates down as chemical prices generally have weakened with demand not able to support higher numbers.

The  question remains, however, whether rather than decline further, Europe might have hit bottom and be experiencing the first signs of recovery.

Certainly, while the EU 27 and eurozone GDP numbers are still negative, the rate of decline has slowed. Demand for automobiles, which is so important for the region’s chemical sector companies, has improved markedly.

EU passenger car registrations in April 2013 rose for the first time since September 2011, climbing by 1.7% year on year, the European Automobile Manufacturers’ Association (ACEA), said on 17 May, although there were two extra working days this April compared to April 2012. Registrations in Spain and the UK showed double digit percentage gains while registration in Germany grew too.

Analysts at Wood & Company jumped on the news suggesting that the bottom may have been reached in European car sales, although they cautioned that any recovery in tyre sales could be a drawn-out process.

US automobile production was virtually stagnant in the first quarter but China posted significant (+15%) growth. Chemical producers supplying the sector in Europe and in the US have been challenged to pass on raw material and energy price fluctuations, and to more closely manage their own cash flows.

Much the same can be said about suppliers to the construction industry, a sector that has been mired in the financial crisis-driven slump.

Most chemical industry executives are cautious to say the least in this environment and can only realistically expect some modest improvement in operating conditions if any at all in the second half.

In the US, the ACC said in its weekly economics report on 17 May that the production of chemicals was unchanged. Basic chemicals output was down with inorganic and synthetic rubber chemicals gains offset by a drop in production of petrochemicals and organic intermediates, and man-made fibres.

“Production of plastic resins was flat in April while production of specialty chemicals fell, with gains in adhesives and sealants and coatings offset by weakness in other specialty segments.”

It added: “ It was in the other chemistry segments – pharmaceuticals, consumer products and agricultural chemicals – where the strength lies.”

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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