Rhine, energy costs, demand to weigh on Europe chemicals – JP Morgan

BARCELONA (ICIS)–Europe-based chemical companies face significant headwinds as logistics problems caused by the low river Rhine, falling demand in key downstream markets and soaring energy costs impact the sector’s outlook.

The analysts flagged up profit warnings by tyre producer Michelin, coatings group PPG, heavy energy user Heidelberg Cement, plus force majeures by BASF in Germany, as indicators of challenging conditions in Europe.

Michelin on Thursday forecast significant declines in passenger car and light truck and truck tyre markets in the late third quarter with further weakness expected in the fourth quarter.

“This is an additional negative datapoint on the overall auto demand outlook in the near term,” said JP Morgan.

PPG, meanwhile, also guided to year-on-year declines in volumes in the auto OEM and general industrial coatings business in the fourth quarter.

The company also sees ~15% year-on-year  increase in freight costs in the same period.

The analysts also suggested that logistical problems from very low Rhine water levels will likely result in both production hiccups and higher freight costs for most chemical companies with German production bases.

On Thursday BASF declared force majeure on butyl-acrylate (butyl-A), 2-ethylhexyl acrylate (2-EHA) and ethyl-acrylate (ethyl-A) production at its Ludwigshafen, Germany, facility because of critically low water levels on the River Rhine.

The analysts also flagged up a profit warning by Heidelberg Cement, a heavy user of energy, which cut its full year 2018 guidance because of significant energy cost inflation.

JP Morgan noted that European chemical companies are also likely to see material headwinds from the recent significant increase in energy/electricity prices in 2019 and beyond depending on the tenure of existing hedges.

Last week ICIS reported that European melamine producer margins are being squeezed amid a significant increase in natural gas prices in the last six months.

Click here to see an interactive map showing water levels along the river Rhine.

Focus article by Will Beacham

Pictured: Low level at the banks of the Rhine river in The Netherlands
Picture Source: Jasper Juinen/EPA-EFE/REX/Shutterstock

Source for graph: JP Morgan, BAFG