Think tank: Europe chemical sector faces tough second half outlook

12 July 2013 09:37  [Source: ICB]

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.

And while there are some indications that market sentiment has improved slightly in the past few weeks from a low point in April/May, the outlook for the second half is bearish.

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 4 July.

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. "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 said 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," he said.

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

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

This is a time of year when Asia demand for chemicals should be seasonally strong as Chinese firms prepare 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 down slightly 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 [the second half of 2013], if speculative traders are forced to liquidate positions created in anticipation of a robust peak season," said Satchell.

By: Nigel Davis
+44 20 8652 3214

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