End-market demand weak to June, but recession fears receding - Nouryon CFO

Author: Tom Brown

2019/09/19

AMSTERDAM (ICIS)--Soft chemicals sector demand growth at the start of 2019 continued to weaken into the summer as economic uncertainty weighed on customer appetite, but fears of a prolonged, global recession are receding, according to the CFO of Netherlands-based producer Nouryon.

“What we saw happening in Q2, a little bit in May and in a pretty significant way in June,” said Renier Vree, pictured.

"[Demand] was a lot lower than forecast and we have had customers that have put in orders saying: ‘Keep the order but please don’t ship it to me until Q3’. So we saw destocking happening across many of our businesses and multiple regions, but more in Europe.”

Nouryon is a key seller to players in the middle of the value chain, which then sell to consumer end markets, giving the company a view of current demand levels within the chemicals sector itself.

“Many of our customers are also in the chemical space [and are] slowing down production based on lower end-market demand,” he said.

“The automotive industry was a key driver of that, there was also a general fear of a recession or slowdown of overall demand and therefore less need to keep too much inventory in stock.”

Falling raw material prices, highlighted by substantial falls in ethylene and naphtha contract pricing in recent months, have also weighed on demand as customers with high inventories hold back on orders in the hope that prices continue to fall.

“You see input prices coming down [for] ethylene or oil, and customers think that by delaying purchases we will get a lower price a month later,” he said.

Nouryon CEO Charlie Shaver told ICIS in July that the extent customer demand has underperformed levels forecast in conversations was one of the biggest shocks of early 2019, as visibility of future growth becomes increasingly opaque.

Weak demand and clients sitting on the sidelines as they eye raw materials price falls has made future demand even more difficult to gauge, according to Vree.

“All these things happened at the same time, which is why June was a pretty significant drop, and we don’t know how this will continue in the Q3,” he said.

“If we ask customers, they also gave signals that they weren’t too sure how their end markets were developing.”

Despite the uncertainty there have been indications of more normalised –albeit still low – market fundamentals beyond that point, according to early indicators for the second half of 2019.

“The fear for a structurally significant drop in demand, a risk we saw more at end of June, that risk has subsided somewhat” he said, noting that many clients now see the recession risk as likely to be a shorter bottoming out rather than a lengthy global contraction.

“I think when you see prices stabilising and end market demand not dropping further then everyone becomes a bit calmer and starts to put orders back in the system,” he said.

Players in markets plagued by oversupply and shrinking margins have attempted to use falling feedstock costs to claw back some profitability, and Nouryon has also managed to hold on to some of the lower pricing, according to Vree.

The company had projected revenue growth in the low single digits for 2019, and expectations remain that demand be slightly improved to flat compared to the previous year.

The first half [revenue] was slightly up, but then also demand is a bit lower, so I don’t think in the end revenues will be up a lot, it will be slightly up or flattish.”

The company is coming up to a year since it broke away from former parent AkzoNobel through a sale to private equity firm Carlyle.

Work on separating out IT infrastructure continues, but Nouyron has develop its own data centres and agreed its own deals with suppliers, with separation work expected to be complete by the October anniversary of the carve-out.

Private equity ownership removes the scrutiny of quarterly financial reporting but adds expectations for strong revenue growth before the company is sold again or taken public.

Nouryon has intensified actions around efficiencies, along with initiatives on pricing and sales.

While a lot of European players have taken steps to move further up the value chain, with companies such as Evonik and Arkema moving to gradually close the door on commodity chemicals production, Nouryon is focused at present on optimising its processes before looking to enter new market spaces.

“We haven’t spent much time on entering into completely new products or markets… That’s more something for the next phase of Nouryon,” he said.

The company has also responded to the impact of the US-China trade war on product flows, particularly in the polymer chemistry space, by shifting around production at some sites to allow sales to continue to both regions.

“We didn’t move factories but we reallocated production in places to make integral cost the lowest, so we produce more in Europe for China rather than the US for China,” he added.

The trade war has also had a strong impact on market sentiment, weakening the economy where it hasn’t impacted directly on product flows.

Overall demand, because of uncertainty consumers will be spending less, companies invest less and therefore demand is at a lower level.

That ultimately has the biggest impact, but it is the hardest to quantify because there are so many factors playing into demand.

Picture source: Nouryon

Interview article by Tom Brown