Europe petchems hopes for Q3 rebound dwindle

Author: Morgan Condon


LONDON (ICIS)--Although activity tends to slow down on the European petrochemicals industry over summer, there are concerns that there is something far more pressing affecting market dynamics this year.

Much of the financial pressure weighing down on Europe remains the result of tensions caused by the US-China trade war, and speculations that key parts of the European economy are teetering towards a recession have been mentioned from the beginning of the year.

In reference to the ongoing  spat a European polyethylene (PE) producer said: “It’s my personal opinion we are running into a recession with our eyes wide open.”

While economic pessimism was not universal in the first quarter, second-quarter results have been less buoyant than expected for many companies, and the belief that conditions will improve in the second half of 2019 is increasingly a fringe perspective.

"It's so quiet, it's unbelievable… ample supply and hardly any spot demand - demand is not going to improve… the automotive industry is doing so badly," said a styrene player.

Even petrochemical players who reported growth in the second quarter are cautious about signalling confidence.

In an interview with ICIS Borealis' CEO Alfred Stern conceded that the trade war could  continue through the rest of the year.

The slowdown undercuts hopes that recovery would be on the horizon for the latter part of 2019.

The extent that demand has softened has been likened by some observers to the aftermath of the global financial crisis.

One fatty acids trader said: "From everything I have heard from competitors, buyers, sellers etc, Q1 was very good, Q2 was okay, Q3 was a disaster.

"Other years have been quite prosperous for everyone, the last time I saw people having to be this aggressive [in offering lower prices] was 2008-2011,” it added.

The main battleground for the trade war has previously been the tariffs placed on materials imported, the focus could shift to global exchange rates.

As US President Donald Trump has announced the fourth round of duties to be placed on Chinese material, China has weakened the yuan to negate potential economic damage.

There are concerns that the euro could be sent reeling after the US Federal Reserve lowered interest rates for the first time in more than a decade.

“The [dollar-euro] exchange rate is already 1.12. It’s very volatile, but this is based on the latest information. It can relax to 1.15 in a month and this wouldn’t be surprise, especially with Trump’s 10% tariffs,” said one polyethylene terephthalate (PET) trader.

A butanediol (BDO) producer said: “If you look at the change to inventory levels in the industry – it is relatively thin because of uncertainty in the global economy.

"Customers are more hesitant to buy product because of what's happening from a global perspective and sentiment in the global chemical industry.”

The concern extends beyond the petrochemical industry, with one Chinese sulphuric acid producer arguing that the trade war was not good for any industry.

"[Trump] changes his mind daily. One tweet and he damages deals. He is killing trade," added the producer.

As the US and China continue to trade blows, Europe remains on the sidelines, as the European Central Bank (ECB) conceded that euro interest rates could ease, despite inflation currently failing to reach its 2% target.

A granular look at European economic activity demonstrates the current frailty, with UK GDP shrinking in the second quarter for the first time since 2012 and declining industrial production in Germany indicate the country's economy could follow suit.

Research from analysts at Oxford Economics shows that Q2 exports from Germany have come down by 1.8%, and production in France fell by 2.3% for June.

Italian exports increased, bolstered by increased demand from Turkey, although sentiment about the state of the  economy remains mixed, with polyethylene prices falling to record lows last week.

“Interest rates are going down in Turkey, which means the cost of credit will go down [and] this will help the Turkish economy,” stated one Turkish polyvinyl chloride (PVC) producer.

In contrast to this, another Turkish PVC producer was less optimistic arguing the country's economy "is very bad and demand is getting depressed" continuously, in line with declining polymer prices in Turkey.

There are concerns that oil prices are behaving in the same way as they did in the run-up to the 2008 financial crash, but some believe the current state of the economy is even more closely linked to the crisis.

“Europe is not in a good shape. I don’t think we recovered from the 2008-2009 crisis," said a polymers distributor.

"A year or two later, people thought it was back on track, then there was another drop … I’m not so optimistic, to be honest.”

Picture source: Filip Singer/EPE=EE/Shutterstock

Focus article by Morgan Condon

Additional reporting by Linda Naylor, Samantha Wright, Caroline Murray, Eashani Chavda, Andy Hemphill, Heidi Finch, Ciaran Tyler and Anne-Sophie Briant-Vaghela, and Helena Strathearn.

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