Trade and political tensions curb 2019 enthusiasm for chemicals

Europe’s chemical industry is facing headwinds in terms of domestic and export demand growth and is not overly optimistic for 2019.

Output is projected to have declined this year, by 0.5%, and is forecast by trade group Cefic to rise by the same amount in 2019.

Demand is likely to be somewhat stronger year on year in Europe’s automotive, agriculture and construction sectors following a difficult 2018 in which northwest Europe producers particularly have been hit by logistics problems on the River Rhine and the downturn in automobile production.

Cefic is cautiously optimistic that there can be some claw-back based on expected manufacturing industry growth although it is clear that business sentiment has deteriorated in recent months.

Consumers and investors are more cautious than they were. Chemicals business confidence is weakened. Credit rating agency Moody’s on Tuesday published its outlook for chemicals in the Europe, Middle East, Africa region and in North America form the lenders perspective.

While relatively positive, it did home in on the prospect of slower demand growth citing autos demand flat to down and generally lower industrial and consumer rates of growth.

The bureau sees North American and Europe chemicals demand growth down and, importantly, weaker demand growth in China. The slowdown is already apparent in commodities. Specialty chemicals demand in China, however, “remains solid” due to increasing market penetration.

Lower oil prices would let specialty chemicals margins to creep up in 2019, Moody’s says, as lower commodity prices feed down production chains. Commodity chemicals are likely to be weaker in most segments but profitability is expected to remain healthy.

Moody’s projects a stable outlook for the chemicals sector as a whole; with average earnings before interest, tax, depreciation and amortisation (EBITDA) improving by 3-4% compared with 2018 as growth slows. This all depends on China’s growth remaining steady and on there being no more significant downturns in either Europe or North America.

The credit rating agency says political risks and trade tensions are the most likely factors to fundamentally shift the outlook.

For chemicals, political risks include China’s growth and financial stability, the possibility of conflict escalation in the Middle East, particularly between Saudi Arabia and Iran, and trade retaliation against US producers. Trade tensions would feature highly in most executives’ analysis of the 2019 outlook. Moody’s points out that the US trade war with China has, thus far, had only a modest negative impact on costs as trade flows have adjusted. It says that ethanol and cellulose fibres have felt the greatest impact.

It is forecasting North America ethylene cash margins falling to $0.25-$0.30/lb by the end of 2019 as the new Sasol, Shintech and Lotte crackers start up.

Ethane price volatility is expected to continue on delays in starting fractionators to separate the natural gas liquids (NGLs) from the natural gas stream. Ethane prices should stabilise in 2020 close to $0.35/gallon.

European margins will decline on more competition from imports, it adds.Polypropylene supplies will remain tight through 2019 until new capacity comes on-stream in 2020. The butadiene market is loosening, it adds,on new capacity in Asia.

It expects new butadiene supply from the ethane gas crackers in the US, although that is the cumulative amount from the new capacity expansions.

Inventory de-stocking led to short-term softness in titanium dioxide prices in Europe and margins are projected to be lower next year on increases in titanium ore prices.

Chlor alkali capacity is expanding more than forecast in Europe and imports will fall as a result, Moody’s says. The US market is likely to be “modestly weaker”.

New capacities will help soften prices for epoxy intermediates and resins while methyl di p phenylene diisocycanate (MDI) supply and demand comes more into balance with new supply.

MDI producers benefitted greatly in 2017 from fly-up prices and are riding the negative year on year consequences.

Moody’s says it expects polyols and MDI to grow at 1.5 to 2.0 times GDP.

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