Commentary: Global outlook for chemicals mixed, but bias to the upside

30 August 2013 14:09  [Source: ICB]

What's next for the global chemical sector has never been less clear, with mixed signals coming from all directions. Yet the bias is to the upside with key indicators pointing up

There is more noise to cut through than ever to get to the global chemical sector outlook for the rest of 2013. There is a barrage of mixed signals on the macro side clouding the future direction - yet the bias appears to be to the upside.

Spot chemical prices have been rising around the globe, pointing to increased demand.

This is being signalled by the Chemicals Volume Proxy, developed by Paul Satchell, UK-based analyst with global investment bank Canaccord Genuity. The indicator is intended to gauge volumes, and thus demand, through weekly changes in 33 spot chemical prices in the US, Europe and Asia, as assessed by ICIS.

This has turned up strongly in recent weeks, and importantly, the uptrend has been "confirmed" in all three key geographic regions - the US, Europe and Asia, and with all three key product groups - olefins, polymers, and aromatics and intermediates.

"The strength of the Europe component is remarkable during what tends to be a seasonally weak period for the industry. The overall move is very broad-based and therefore gives high conviction," said Satchell.

However, the analyst throws in a heavy dose of caveats. "In contrast, market intelligence is both mixed and volatile, with patches of improved demand being reported, but being short-lived. There are, as yet, no visible signs of a return to the more orderly buying patterns which are a key hallmark of healthy chemicals markets," said Satchell.

And despite concerns about China's slowing economy, the latest numbers are encouraging. Global investment bank HSBC's flash China manufacturing Purchasing Managers' Index (PMI) came out at 50.1 for August - a four-month high.

On 26 August, China's refining and chemical giant Sinopec released first-half results, noting a 4.7% increase in domestic consumption of ethylene equivalents. Looking to the second half, Sinopec expects domestic demand for chemicals to maintain steady growth. Yet global equity markets are becoming increasingly concerned about the US Federal Reserve taking away the punch bowl from the party by tapering its $85bn/month in purchases of debt securities - its quantitative easing programme.

This has driven up interest rates in the US, and had ripple effects worldwide, especially on emerging market countries with high current-account deficits that have to be funded with US dollars. India, Malaysia, Thailand, Turkey and Brazil have seen sharp drops in their currencies and equity markets.

The US economy has continued to show steady but weak growth, with second-quarter GDP coming in at 1.7%. If one dichotomy characterises the nature of the recovery, look no further than the automotive sector. US auto sales have recovered strongly to around 15.8m units annually, and are projected to be up by double-digits in percentage terms in 2013. However, the US replacement-tyre market is as depressed as ever.

Also, sales of new homes fell by 13.4% in July. Higher mortgage rates are crimping the appetite for loans.

Yet another major chemical indicator is pointing up. The American Chemistry Council's (ACC) Chemical Activity Barometer (CAB) logged a year-on-year gain of 3.8% in August - the highest since September 2010, and the highest reading since June 2008. "As we approach the fourth quarter, the US economy seems to be making strides, compared to the baby steps of earlier in the year," said ACC chief economist Kevin Swift. "The CAB is showing a strengthening of year-over-year growth and suggests an economy which finally may be gaining momentum."

But two more potential huge macro events loom. This includes an impending US airstrike on Syria (as of 29 August) in response to the latter allegedly using chemical weapons, and the US coming up against its debt ceiling once again.

Further instability in the Middle East could jack up oil prices and disrupt trade. And political brinksmanship on raising the debt limit as the US runs out of funding by mid-October could cast further doubt on the near risk-free nature of the government's obligations.

Self-inflicted financial instability is the last thing the world needs as it struggles to put together an economic recovery.

By: Joseph Chang
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