Europe polymers demand to be hit by slowing GDP growth

Author: Rhian O'connor

2020/03/12

LONDON (ICSI)--Europe's lower GDP growth in 2020 could cut demand for polymers, although the destocking effect may be less pronounced than in the 2008-2009 financial crisis, according to analysis by ICIS.

Three interlinked factors are currently impacting polymer demand in Europe and globally: lower crude oil prices, coronavirus, and general economic malaise.

These factors are not independent of each other, obviously: weaker demand from the coronavirus adds to the economic malaise and weak oil prices.

GDP forecasts are being downgraded on an almost daily basis.

The coronavirus outbreak and, more importantly, lockdown efforts by national governments have already led to lower demand.

London-based analysts at Oxford Economics have cut GDP growth forecasts for the eurozone to 0.6% this year, the weakest in seven years, and around 1.3 percentage points lower than forecasts a year ago.

In theory this leads to a cut in demand for plastics across the European region.

The most impacted are polyester fibres which are used for clothing, polyvinyl chloride (PVC) and polypropylene (PP).

Using regression analysis, we can see that for many polymers the 0.6% GDP growth rate could translate as a fall in demand for resin in 2020, with PVC and low density polyethylene (LDPE) likely to be down around 1.5%.

The impact on ICIS current demand forecasts can be seen below

SOURCE: ICIS Supply & Demand Database

However, the actual impacts are likely to be far less, given that the GDP downgrades are not uniform across all sectors.

The nature of the coronavirus crisis is that the worst impacted sectors are services industries, especially travel and tourism.

PANIC BUYING - SHORT-TERM BOOST
Many sectors like food packaging have seen little impact. In fact, anecdotal evidence is that panic buying may be boosting retail sales including food and freezers.

Oxford Economics recently downgraded some industry forecasts for Europe – most noticeably motor vehicles, textiles and agriculture.

However, domestic appliance and consumer durable production numbers were pushed up.

Added to this is the uncertain impact of stocking or destocking through the chain.

The last time oil and chemical prices fell so sharply was in 2008/2009, with the resulting falls in inventory values leading to mass destocking through the chain, further compounding demand reductions.

However, after this time most chemical companies changed inventory policies and reduced stocking.

Most market participants said inventories across mainland Europe are quite low, and the mass destocking occured in 2009 is not expected again.

In the UK and Ireland, fears of trade disruptions after a hard Brexit have led to some stocks and these could be hit by falling asset values.

However, this may not lead to mass destocking due to continued supply risks.

As a result, the impact of these cuts on GDP remains hard to predict.

Clearly, there will be a demand hit with some polymers harder hit than others, but the impact will depend on how each individual end market reacts.

ICIS is developing a new model for polymer demand by looking at individual end markets, using that to predict individual resin consumption.

Focus article by Rhian O'Connor

Additional reporting by Will Beacham