Commentary: The economy question

03 January 2014 09:31  [Source: ICB]

Prospects for chemical industry performance in 2014 are clouded by uncertainty about the direction of the global economy. The prime concern is still Europe, where eurozone growth is forecast to attain a measly 1% in 2014, though this is a big improvement on previous years. Although prospects are better for some in northern Europe, economies in the south and east are still mired in recession or extremely tepid growth. In Spain, for example, house prices are still falling and the unemployment rate remains stubbornly high.

Shale gas pipes Rex Features

Rex Features

Shale gas boom has helped pick up the US economy

Meanwhile, even economies that appear to be on the mend are unlikely to stimulate much new demand for chemicals. In the UK, wages have failed to keep up with inflation for many years, leaving consumers with much less spending power than prior to the 2008 financial crisis.

In Asia, China’s performance was lacklustre during 2013 and there are suggestions that this could continue into 2014. The new regime seems to be determined to continue a rebalancing of the economy towards domestic consumption, rather than a reliance on exports. Yet the country still relies heavily on export markets and many of these have slowed.

Prospects are a little brighter for the US, where the economy is benefiting along the value chain from access to cheap energy and inexpensive raw materials based on shale gas and oil.

For the chemical industry, the contrast between the US and Europe could not be starker.

Last week, Nova Chemicals announced plans to boost ethylene capacity in Ontario by 20%. This tops off a list of new ethylene and derivatives projects announced in North America totalling over 10m tonnes/year. In Europe, by contrast, ICIS analysis shows there have been 23 plant closure announcements during 2013 alone, cutting 4.2m tonnes of chemical production capacity.

Europe is being punched from two sides: the region’s poor economy has hit demand, while its reliance on naphtha as a feedstock has lowered its competitive position versus North America and the Middle East.

It will be interesting to see if a recovering economy in Europe will do anything to slow the steady trickle of capacity closures which has accelerated during 2013.

While optimists see strong signs of a global economic rebound, others, such as International eChem’s Paul Hodges predict continued slow growth, driven by demographic trends.

By: Will Beacham
+44 20 8652 3214

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