Market outlook: Global chemical growth to be driven by the US, Asia

Worldwide chemicals production growth in 2013 is expected at 2.2%, weighed down by Europe. In 2014, the US chemicals sector will be the one to watch

Trends in global chemicals production will continue to be uneven in 2013. With expected growth of 2.2% this year, the industry, like many, remains under pressure. While the sector has a favourable outlook in some regions – for example, the Americas and Asia – in others it is still attempting to recover from blows dealt by the global recession and increasing competitive factors.

Estimated at $3 trillion (€2.2 trillion) excluding pharmaceuticals, global chemicals production had a similarly mixed year in 2012, growing just 2.5%. In Japan and the EU, production declined by 4.5% and 1.4%, respectively, compared with 2011, offset by production growth in the US (+2.5%), Latin America (+1.8%) and Asia (+7.5%).

The chemicals industry is a cyclical business, highly dependent on changes in the global economy and reliant on basic commodity costs, especially oil and gas.

As many chemicals products are consumed at early stages in the production supply chain, the industry is often considered an early indicator for the economic cycle.

In general, chemicals are highly reactive to changes in the world’s regional GDP. For instance, the contrast between the US economic recovery and the persistent crisis in southern Europe caused fluctuations. The sector is also dependent on the health of other manufacturing industries, chiefly automotive manufacturing (15% of chemical sector revenue) and construction (10% of revenue).

AMERICA IS BACK
The US chemicals industry is expected to grow 2.8% in 2013, supported by increasing demand from several key end-use markets such as appliances, computers and electronics, plastic and rubber products.

American automotive manufacturing industry demand remains one of the most positive factors supporting the chemicals industry. The shale gas boom is also a main growth driver, with recoverable US reserves estimated at 20 trillion cubic metres.

As a result, gas prices are three times cheaper in the US than elsewhere in the world, constituting a huge advantage for highly energy-intensive downstream industries such as chemicals.

In addition, ethane produced from shale gas is surpassing naphtha (its liquid rival) as the most important chemical raw material, both as a source of energy and as a feedstock of ethylene, particularly for the plastics industry. Chemicals exports increased by 1.8% to $190bn in 2012, consolidating the trade balance.

Lucrative prospects underpin the increase in overall US chemicals investments. The US chemicals trade association, the American Chemistry Council (ACC), estimates that 50 companies plan to substantially expand capacities through 2017.

ASIA AT FULL VOLUME
Asia is not to be outdone by the renewed competitiveness of the US chemicals industry. As in Europe, Asia suffers from higher energy costs. However, it also benefits from buoyant regional demand due to fast-paced industrialisation and extensive infrastructure needs. Excluding Japan, Asian chemicals production is expected to increase by 8% in 2013.

While strong demand will increase price levels, and thus margins, this market is not necessarily risk-free. Overcapacity could appear following local and foreign players’ massive investments in basic chemicals during the last five years.

Excess supply is also quickly reducing margins at Asian chemicals companies – too many of which are small, with varying levels of financial stability. A slowdown in the Asian chemicals industry’s export trade will be offset by healthy domestic demand in its two main markets – the automotive industry and Chinese construction.

China’s auto sector is one of the global drivers for chemicals Copyright: Rex Features

EUROPE BRINGING UP THE REAR
The European chemicals industry, currently estimated at 8% below its peak, has not yet regained its pre-crisis production levels. Chemicals production in Europe declined by 2.1% in the first quarter of 2013, according to the European Chemical Industry Council (Cefic). This trend was gaining momentum by May 2013, versus a 2.5% drop in the same period in 2012.

The impact of the European petrochemical crisis is largely to blame for this fall, having caused 11% year-over-year volume declines related to higher energy supply costs when compared to competition across the Atlantic Ocean.

As a result, European chemicals companies may lag behind in the long run should their margin rate remain at levels insufficient for new facility investments. In addition, the sector is impaired by persistent weakness in its eurozone downstream markets – automotive manufacturing and construction.

Alone, agricultural chemicals (5% projected increase) and cosmetics (0.4% projected decrease) are unable to make up for the sector’s shortfall.

While agriculture chemicals benefit from buoyant demand for fertilizer and phytosanitary products, the cosmetic outlook is tied to household consumption trends, which have been at a standstill for the past two years.

Nonetheless, the European chemicals industry strives to remain competitive internationally, accounting for approximately 40% of intra- and extra-EU trade. This stems largely from the strength of the German chemicals industry, which has always been export-orientated.

Germany-based BASF, the worldwide leader in chemicals, reported 2012 revenue 1.5 times higher than its nearest competitor.

Moreover, many European chemicals companies implemented drastic cost cutbacks, enabling them to surpass 2009’s violent slump and become key players in certain fields. This has allowed them to resist calls for price cuts from their customers, and some have even attained must-have pricing power for their chemicals products.

EYE TOWARD THE FUTURE
Looking forward, the US chemicals industry is the one to watch. In 2014, the credit quality of North American chemicals companies is expected to stay healthy, supported by a firming recovery of the general economy.

The industry will grow at a moderate pace of about 3.2%, reaching total revenue of $870bn. Margins are expected to be quite robust – perhaps even boosted – because of 
continued support from low natural gas prices. Liquidity will remain healthy, thanks to conservative corporate balance sheet management, generally high cash reserves and easy access to credit for most major players in the industry.

Marc Livinec is a sector advisor for Euler Hermes regarding chemicals, pharmaceuticals, and oil- and energy related industries. He produces global sector analysis for the company’s policyholders, partners and related businesses. Euler Hermes is a global provider of trade credit insurance, which helps businesses avoid losses through nonpayment of commercial debt and grow profitability by making informed credit decisions.