INSIGHT: Europe chemical markets a struggle, growth uncertain

25 September 2013 17:15  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The uncertain demand growth environment in Europe continues to weigh heavily on chemical producers no matter where they sit in the chain.

Upstream producer margins improved at the start of the third quarter but as September nears its end, the downstream markets simply do not appear strong enough to lend any clear support to improved profitability. Margin improvements in ethylene have been driven by lower input (naphtha) costs.

Polyethylene buyers said this week that they thought a peak of pricing had been reached and that they were not prepared to pay more in October than in September.

The tension in the Middle East had prompted some buying ahead of expected cost increases. But it has been clear that real market demand has not been sufficient to help drive the market higher.

At the macro level, Europe is showing more signs of life but companies still have to plan and take action to deal with the worst.

The region is pulling out of recession only painfully slowly with unemployment high and manufacturing under pressure.

The Markit composite purchasing manager’s indices (PMIs) for the troubled eurozone, continued to send out a positive message this week. “An upturn in the eurozone PMI in September rounds off the best quarter for over two years, and adds to growing signs that the region is recovering from the longest recession in its history,” said the research firm’s chief economist, Chris Williamson.

The upturn was still being led by Germany with business activity in France increasing for the first time since early 2012, Markit said.

Of concern, however was the fact that the pace of manufacturing growth had slowed and slipped from an August 27-month high. Manufacturing output had risen for the third month in a row in September but the pace of growth slipped from that in August.

The story was similar for the pace of growth in new orders although the improved order inflows meant that backlogs of work stabilised in September. They had been falling from June 2011.

While planning for at least somewhat stronger growth in 2014, chemical producers are having to continue to make cuts in Europe, which for multinationals is the high cost, low growth region.

The cuts have come upstream, for companies such as Dow Chemical and LyondellBasell, and are being made by smaller, downstream players.

LANXESS on 18 October revealed its plans for cutbacks in the face of the downturn in the auto and tyre markets. “Due to the current situation we must now take action,” management board chairman Axel Heitmann said.

“We are seeing first signs of stability in the market but it is too early to say when and how quick a recovery will take hold,” he added.

The polymers and speciality chemical company wants to cut back in Germany, Belgium, France, the US and in China and in the uncertain global, let alone European, demand environment reduce capital spending sharply.

Coatings producers AkzoNobel said on Tuesday that its current restructuring programme is on track and that the economic environment continues to be challenging.

It will book €256m ($346m) of restructuring charges between October and December this year.

A stabilised eurozone might be expected to start to grow at a faster pace next year but high unemployment and fiscal belt-tightening are expected to continue to constrain growth.

Europe does seem to be going nowhere fast.

The German research group DIW, for instance on Wednesday forecast that Germany’s economic recovery would be slower than expected earlier. “Companies are assessing their current situation more cautiously, but they remain confident about the future,” DIW economist Ferdinand Fichtner said.

Germany’s economic growth slowed from 0.7% in the second quarter to 0.3% in the third, the DIW reported. Fichtner said. It expects 0.4% GDP growth for the full year.

($1 = €0.74)

(Additional reporting by Linda Naylor, Nel Weddle, Will Conroy, Tom Brown, Nurluqman Suratman and Tom Brown)

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By: Nigel Davis
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