25 October 2013 10:01 [Source: ICB]
The Chemicals Volume Proxy has slipped into negative territory, confirming company management sentiment on fourth quarter results. But another indicator signals US strength
It’s time to flash a caution signal for the global fourth quarter business environment and earnings prospects. After posting strong third quarter results, a number of chemical companies are signalling a more challenging fourth quarter of 2013.
Developed by Paul Satchell, UK-based analyst with investment bank Canaccord Genuity, the indicator gauges volumes, and thus demand, through weekly changes in 33 spot chemical prices in the US, Europe and Asia, as assessed by ICIS.
“We believe that the weakness which has become clear over the past few weeks is probably caused by de-stocking, following a period of inventory build during the surprisingly strong third quarter,” said Satchell. “In our view, real demand fundamentals have been so poor that inventory cycles have become the prime determinant of marginal demand.”
The position of the Chemicals Volume Proxy today at a combined -11 stands in stark contrast to late August when it peaked at +19. In the 30 August Commentary, we highlighted the strength in the indicator, concluding that despite the mixed signals in the market, “the bias is to the upside”.
But now, caution is warranted as we approach year end. The analyst also notes that weak overall demand is leading to frequent and sharp reversals in the indicator.
“Given what we see as fundamentally fragile demand for basic chemicals in key markets, it is unsurprising that the index has, in recent months, shown sharper and more frequent reversals than tends to be the case in more orderly demand environments,” said Satchell. “Volatility in the Volume Proxy has always been a sign of disorderly underlying markets.”
However, at least for the US, the American Chemistry Council’s (ACC) Chemical Activity Barometer (CAB) is signalling strength through the fourth quarter for US industrial production. The CAB in October was up 0.3% from September on a 3-month moving average basis, and up 3.1% year on year.
“Production of plastic resins used in consumer applications appears actually to be strengthening, suggesting further gains driven by consumers. This bodes well for retailers as the important holiday shopping season approaches,” said ACC chief economist Kevin Swift.
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