Chemical sector confidence in business conditions plummets – July CMCI

LONDON (ICIS)–Chemical market sentiment on current business conditions has fallen sharply in July month on month, analysis of the ICIS Chemical Market Confidence Index (CMCI) showed on Tuesday, in the first CMCI conducted since the UK referendum vote to leave the EU.

The sharp fall in confidence in business conditions compared with 12 months ago shows the direct impact the financial instability caused by the Brexit vote has had on the chemical industry and follows warnings from the VCI, the IMF and others of its impact on European GDP growth.

The major petrochemical end-use markets are heavily linked to GDP growth and negative macroeconomic conditions have a significant effect on markets.

Nevertheless, views on future business conditions over the next 12 months are broadly unchanged from their June level, although this hides a sharp polarisation between persona type and position in the market.

Producers, traders and distributors have become more positive on future business conditions over the past 12 months and also more confident that order book volumes and profitability will grow in the next 12 months.

Buyers, conversely, have become sharply more negative on future conditions, deeply uncertain over both profitability compared with 12 months ago and profitability expectations over the next 12 months.

Building block chemical markets have become more confident across all indicators compared with June, except for current business conditions, while intermediate markets have become more negative across all indicators and downstream markets more negative on all indicators except for current and future order book volumes.

The growing confidence at the top of the chain, and the broadly higher confidence from producers, suggests a shift towards a sellers’ market. This may be driven by expectations that currency rate movements and a potential negative impact on crude oil prices from the financial uncertainty could lead to a more favourable cost basis, encouraging higher domestic demand and exports.

The fall in buyers’ expectations on future profitability, combined with an increase in confidence in current profitability, is in reality a shift towards uncertainty with both indicators registering a 0 reading in the July index. This uncertainty is understandable in the shadow of the broader unsettled macroeconomic environment.

Intermediate markets saw the sharpest falls in confidence in July, particularly on current business conditions and current and future order book volumes.

This is again likely linked to macroeconomic uncertainty and its effect on downstream demand, coupled with a potential shift to a seller’s market, which, if it comes to pass, could lead to margin pressure on intermediate markets from both sides of the chain.

Although downstream markets have seen confidence in current and future business conditions and profitability compared with June, confidence in current and future order book volumes continues to increase.

This suggests that although downstream markets do not expect demand to be affected by the more negative wider trading environment they are expecting this to lead to price pressure as end-use markets potentially come under pressure on their own margins.

In the past three months views on all current indicators have broadly weakened, as have views on future business conditions. Nevertheless, confidence in future order book volumes has increased, while views on future profitability remain broadly unchanged.

Europe CMCI May-July 2016

The ICIS Europe CMCI aggregates sentiment from hundreds of petrochemical market players actively involved in price negotiations across more than 60 different markets.

The Europe CMCI runs from +100, to -100, with zero on each index representing neutral, or uncertain conditions, a negative score indicating bearish expectations and a positive score representing bullish expectations. The indeces also gather sentiment on the comparison between the current situation and the situation across the past 12 months to give a complete picture of current market conditions and confidence. The information is gathered in the third week of each month.  A full methodology is available on request.

For more details on the overall Europe CMCI data, click here