INSIGHT: Europe’s demand weakness, price decline signal tough H2

04 July 2013 17:02  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Europe’s petrochemicals producers and plastics makers have had a difficult second quarter. Output has been cut back in the face of weak demand and in attempts to shore up margins. There are some indications that market sentiment has improved slightly in the past few weeks but what appears to have been a low point was reached in April/May.

The latest output data tell a sorry tale. EU petrochemicals output in April fell by 11.3% year on year. Plastics production was down 5.9%.

Business sentiment is not great either. Trade group Cefic’s chemicals confidence indicator was unchanged in May from April. Production expectations for the chemicals sector as a whole in the EU were even lower in May than they had been in April. “Chemicals industry confidence remains below average,” Cefic said.

All of Cefic’s data are available from the EU statistical arm, Eurostat. The production numbers, particularly, are reflecting stagnation, if not a continued industrial slowdown, against the backdrop of not as bad economic decline.

The latest Eurostat data show EU and eurozone chemicals production down 4.0% and 4.2% respectively in April compared with the same month last year. The declines from March 2013 were 1.6% and 1.8%.

Chemical prices have fallen alongside the reduced output. Petrochemicals prices were down 2.9% in April year on year, the trade group noted on Tuesday this week. EU plastics prices in April were down 1.1%.

Eurostat data released on Tuesday showed that EU chemical producer prices had fallen by 1.8% year on year in May 2013 versus May 2012 and 1.9% in the eurozone.

The chemicals decline was not following the wider industrial picture which reflected a stagnant EU and eurozone industrial sector. This must be an even greater cause for concern and probably reflects the importance of construction to the chemicals sector. Construction activity in certain parts of Europe remains depressed.

As the second quarter reporting season gets under way later this month most attention will be given to the outlooks for the second half.

The Cefic data show that confidence is not great but that order books overall have improved slightly. ICIS has reported some uptick in cracker operating rates and there appears to be some greater buying activity in the polymer chains.

But this year has been characterised by buyers moving in and out of the market driven largely by price expectations and movements in the price of crude oil.

Some analysts believe that incremental demand growth in basic chemicals over the past three years has been driven largely by purchasers moving into the market to build defensive inventory ahead of the impact of upward crude price movements.

The ICIS petrochemical price index, IPEX, for Europe this July is up slightly (plus 1.5%) month on month (it charts a basket of European petrochemical prices) with the increase dominated by polyethylene (PE). Europe US dollar denominated PE prices climbed 4.6% higher as production was cut back due to weak demand.

Integrated PE margins (variable margins for PE producers integrated back to a cracker with cracker co-product values taken into account) were last week however down on higher feedstock costs and the stronger US dollar.

Average ICIS-derived second-quarter 2013 integrated PE margins were 20% lower than in the second quarter of 2012 although they were up 14% on the first quarter of 2013.

The depressed and uncertain economic outlook in Europe weighs heavily on the chemical sector and the outlook for the second half of the year is not good.

There are early indications that petrochemicals and polymers demand in Europe will continue to fall.

Canaccord Genuity’s Volume Proxy for petrochemicals and plastics suggest this, having shown an extraordinary decline in the latter part of June, the bank’s chemicals analyst, Paul Satchell said on Thursday.

The Volume Proxy is a leading indicator developed by Satchell based on weekly changes in spot prices assessed by ICIS for 33 products in the US, Asia and Europe. The index is simply calculated from the number of rising prices minus the number of falling prices.

“The most striking feature of the [Volume Proxy] chart is the scale of the collapse in the Europe line,” Satchell said in his latest note to clients.

“We saw the recent peak as a corollary of the market disruption following flooding in the key European waterways. Restoration of normal logistics following the disruption could be a factor in the fall, but the fact remains that the Europe line is negative and falling, just as we head towards the traditional summer lull."

Satchell says that softer demand over the summer period can be prolonged when underlying demand patterns are weak. The summer lull can even be absent when demand is strong.

“The extent of the fall in our Europe line could therefore be a sign of an early start to the summer lull, which in itself would be a negative indication for demand.”

Satchell is bearish on the second half for chemicals generally based on the weakness in Europe and concerns about Asia.

His indicator for Asia has shown a recent decline which, he says, is arguably more important than the decline in Europe.

This is a time of year when Asia demand for chemicals and plastics should be seasonally strong as Chinese firms prepared for China’s peak manufacturing season.

This is when goods are made for export to the West ready for the Thanksgiving, Christmas and New Year holidays.

The Volume Proxy line for Asia turning slightly negative at this time is a bearish indicator, he suggests, and an early indication that China’s manufacturing season is likely to disappoint again.

“From a chemicals’ perspective, there would be potential for further disruption during 2H13 [the second half of 2013], if speculative traders are forced to liquidate positions created in anticipation of a robust peak season.”

Canaccord Genuity Volume Proxy to end June 2013

Canaccord Genuity Volume Proxy to end June 2013

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By: Nigel Davis
+44 20 8652 3214

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