Market intelligence: Europe and China show stronger-than-expected PMI readings

30 August 2013 09:44  [Source: ICB]

Both eurozone and China flash positive readings in their Purchasing Managers' Indexes. Sentiment improves in Europe, but the China picture is far from clear

"The euro area's economic recovery gained momentum in August, with manufacturing and service sector companies reporting the strongest pace of expansion for just over two years," research firm Markit's chief economist, Chris Williamson, said on 22 August.

"So far, the third quarter is shaping up to be the best that the euro area has seen in terms of business growth since the spring of 2011. The economic picture from the surveys is therefore coming into line with policymakers' expectations of a modest yet still fragile return to growth."


 Germany is showing greatest strength in manufacturing

Copyright: Rex Features

Germany is leading the eurozone upturn, with growing domestic demand and exports.

Markit's flash Purchasing Managers' Indexes (PMIs) for August were higher than expected, with the firm's eurozone composite output index at 51.7, the highest since June 2011. Manufacturing showed the fastest output growth since May 2011.

New orders in manufacturing and services were up marginally. "The small increase nevertheless being significant in indicating the first improvement in demand for goods and services since July 2011," Markit said.

The research shows that output from Germany is growing at the fastest rate, with its manufacturing PMI at a 25-month high.

Tim Moore, a senior economist at Markit and the author of the flash PMI report for Germany, said the latest data "provides confirmation that Germany's economy is back on a solid footing and likely to remain in expansion through the third quarter of 2013".

"Manufacturing was an especially bright spot in August, with the latest figures suggesting that a rebound in export orders helped output growth accelerate to its strongest for over two years," he added.

The contrasts within the eurozone though are sharply exposed, with output from France declining at a faster rate in August than in July on lower services activity and a renewed fall in manufacturing output.

This points to "lacklustre domestic demand", ­Williamson said. The August PMI for France, however, is well above the lows seen earlier this year. "The dataflow continued to improve outside of France and Germany, suggesting that a long awaited recovery seems to be taking shape in the 'periphery'," he added.

"Output and orders rose at the strongest rates since early-2011, with a broad-based improvement in domestic and export sales suggesting that the recovery is also looking more sustainable."

Europe's chemicals markets are testing that sustainability in the third quarter, with most sectors showing some growth and clearly better conditions than in May, which seems to have been a low point.

Chemical producers in Europe struggled with weak demand in the first half of the year but have seen some improvement in recent weeks. They have also reached the point where their higher oil-related costs could be passed onto customers.

Somewhat stronger China growth is playing a part in that. "China's manufacturing growth has started to stabilise on the back of modest improvements of new business and output," HSBC's chief economist for China, Hongbin Qu, said on 22 August on the release of the bank's flash China manufacturing PMI, also compiled by Markit.

It was 50.1 for August, from 47.7 in July, and at a four-month high.

China's manufacturing output is stabilising as companies restock despite "the continuous external weakness," Hongbin said. He is encouraged by the data and the fact that the fine-tuning of China's economy appears to be working through to manufacturing.

"We expect further filtering-through, which is likely to deliver some upside surprises to China's growth in the coming months," he added.

Industrial end-use markets in China have been difficult for some time, and chemicals have felt the impact, so stronger, and steadier growth would be welcomed.

In late July, China government statistics showed a robust 13% year-over-year rise in apparent demand for polyethylene (PE) in the first half, surprising most market observers.

This has been attributed to everything from food-safety concerns spurring increased consumption of packaged produce, to restocking and reduced imports of scrap plastics because of government policies.

However, it is still being reported that demand for polyolefins, for example, remains weak with traders and end-users on the sidelines of the market.

"I just can't see how real demand could have possibly gone up by 13%, the market has been far too quiet for that, at least when I talk to my customers. All the end-users we deal with remain very cautious and are still unwilling to commit to big volumes. There has been a slight amount of 'buying ahead' because of concerns that supply, especially of LDPE, will get even tighter," said one Singapore trader.

"But everybody we speak to continues to be very worried about the economy because of the weak state of export demand and all the domestic policy uncertainties.

Back in Europe, however, chemical business sentiment does appear to be improving.

UK chemical producers are expecting stronger sales growth over the next 12 months. And for the first time in two years, more respondents to a survey from the country's Chemical Industries Association (CIA) expected margins to increase than expected them to fall.

Additional reporting by John Richardson in Perth and Will Conroy in London

By: Nigel Davis
+44 20 8652 3214

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