INSIGHT: Global manufacturing PMIs jump but headwinds hinder full chemicals recovery

Author: Joseph Chang

2020/08/04

NEW YORK (ICIS)--Global manufacturing purchasing managers’ indexes (PMIs) are finally in expansion territory, coinciding with volume recovery in some key chemicals markets in early Q3. Yet major headwinds persist and will hamper any full recovery from the coronavirus-induced recession.

The July manufacturing PMIs for the US, Eurozone and China for July surged, bringing all three key regions into expansion mode (above 50) for the first time since November 2018. The strong rebounds in the key leading indicator give some hope that an industrial recovery is under way.

Chemical company outlooks following Q2 earnings and conference calls show a mixed picture but also clear signs of improvement in certain markets. Polyethylene (PE) volumes are recovering not only sequentially month-to-month and quarter-to-quarter but also year on year, driven by China.

“PE demand is quite strong, and in fact, there was very significant year-over-year growth when we look through Q2 for China PE, and prices have responded quite a lot,” said Bob Patel, CEO of LyondellBasell, on the company’s Q2 earnings conference call.

In the US market, on the back on low inventories and higher exports, Patel sees a “good chance” for the proposed US August polyethylene (PE) price increase of 5 cents/lb ($110/tonne) to be implemented on top of increases in June and July.

Brian Pruett, senior vice president covering PE and polypropylene (PP) at Chemical Data (CDI), which is now part of ICIS, sees total PE demand up 10% year-to-date with US exports up 28% in the same period.

“It’s almost like we’re not having a Covid-19 pandemic in the PE market,” said Pruett on an ICIS podcast.

But PE is largely the exception. PP on the other hand is seeing significant demand declines, as it is more exposed to the automotive sector and other consumer durables such as appliances.

Domestic US demand is down 4% year-to-date but demand is improving month to month and inventories have come down to a more balanced level, Pruett added.

TIO2 RECOVERY GRADUAL

Pivoting to titanium dioxide (TiO2), the ubiquitous white pigment used in paints and coatings as well as plastics, paper and laminates, the CEO of the world’s largest producer Chemours is encouraged by the monthly volume trends coming off the bottom in mid-May.

“June was stronger than May, July has been stronger than June, and the order book for August is looking solid. We feel very good about where the volume trajectory is going right now,” said Chemours CEO Mark Vergnano on the company’s Q2 earnings conference call.

“We think sequentially the [third] quarter is going to be positive - somewhere in that low- to mid-teens point,” he added.

However, that’s coming off a 20% sequential TiO2 volume decline in Q2.

For TiO2 on a geographic basis, North America is holding up, Asia is improving the most and Europe is starting to come back, the Chemours CEO noted.

“China is obviously starting to [become] the most positive region from an economic direction and remember China is the largest user of TiO2 at the same time,” said Vergnano.

Yet there are no illusions of a V-shaped recovery, at least in TiO2.

“We don’t anticipate a V recovery. We anticipate more of a gradual recovery, with the only flyer here being how much stimulus is being put into the system by different countries,” said Vergnano.

EASTMAN SEES VOLUMES IMPROVING

US-based Eastman Chemical, perhaps one of the most diversified intermediates and specialty chemicals producers in the sector with a wide range of chemistries and end markets, also reported improving trends month to month.

Overall volumes increased by 8% in June from May, and they rose another 4% through July from June.

August volumes are “looking similar to July”, which is a positive, considering normal seasonal declines in August, said CEO Mark Costa on the company’s Q2 earnings conference call.

Even for the automotive, tyre, building and construction, and consumer durables end markets, demand is beginning to recover sequentially from the low levels in Q2, he noted.

VISIBILITY LIMITED

Despite the sequential month-to-month improvements, managements for the most part continued to offer no profit guidance for 2020 on limited visibility, underlining the great uncertainty that prevails in the global business environment.

The continuing spread of the coronavirus in the US, and a second wave in Europe and parts of Asia makes any recovery tenuous at best.

The bottom line is that until there’s an effective vaccine and people feel safe to move around and engage in a range of activities that don’t require social distancing, economic activity will never fully recover.

In the meantime, central bank and fiscal stimulus must bridge the gap to the other side. The EU’s €750bn recovery package which includes €390bn in grants to weaker countries is a huge boost for the region.

But as of 4 August, the US Congress has not been able to agree on terms for additional stimulus. Meanwhile, the enhanced unemployment benefit of $600/week expired at the end of July.

CHINA RECOVERY - IS IT SUSTAINABLE?

China was the first to come out of coronavirus lockdowns and appears to be managing additional outbreaks well, leading to a more robust rebound thus far. However, chemical company managements pinning their hopes on continued strength through 2020 may be disappointed.

A V-shaped recovery in China is being driven by production - not true downstream demand, noted John Richardson, senior ICIS consultant, in an ICIS podcast.

“Lots of cheap oil was imported by China…, put into storage and is going into chemicals production,” said Richardson, citing a 70% jump in paraxylene (PX) production in the first half based on ICIS data, as well as increases in PE, PP and styrene production as well.

“It’s all gone into inventory because imports were not down much. In fact, in PE they were higher,” he added.

With China PE imports over 20% higher and PP imports over 50% higher than normal in Q2, along with increasing domestic production, “that’s not about demand - that’s about buying cheap product”, said Paul Hodges, chairman of consultancy International eChem on the podcast.

“China now has enough oil in commercial storage to run for three months at last year’s rate… You have a supply-led recovery - you haven’t got a demand-led recovery,” he added.

Additional reporting by Will Beacham, Anna Matherne and Stefan Baumgarten

Insight article by Joseph Chang

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