Europe chems sentiment starts to sag despite stagnant high prices

Morgan Condon

07-Jul-2022

LONDON (ICIS)–Manufacturing activity in Europe has started to stall, according to the latest data, but this does not mean prices are guaranteed to drop in the coming months.

Although producers have been able to pass down costs so far, the tide may be turning, as expectations hit their lowest point since October 2020 because of the wider macroeconomic picture.

Not only will the chemicals sector be impacted by any change in conditions, but as market feeding into many key downstream manufacturing industries, could indicate where the wider economy may be heading.

ECONOMIC EXPANSION CONTINUES
The slowdown was recorded in the latest purchasing managers’ index (PMI) data, which fell to a 16-month low at 52.0 points in June from 54.8 points, a fractional slowdown from the 52.1-point flash reading.

The composite eurozone output index data from S&P Global indicated that despite the slower pace of growth, the economy continued growing as it has every month since March 2021.

Eurozone flash PMI indices
(below 50.0 points = contraction)
June May Trend
Composite 52.0 54.8 16-month low
Services 53.0 56.1 5-month low

Prices also continued rising, although as inflation eased from March’s peak, leading to charges rising at a slower pace.

Companies in the eurozone continued to face capacity pressures in June to meet outstanding business, and collapsing demand led to the slowest backlog accumulation since March 2021.

This in turn led to an increase in new job creation for the 17th successive month, albeit at the slowest pace since December.

IMMINENT DEMAND DOWNTURN
The stagnation of wider manufacturing trends may be the calm before the storm.  Germany’s chemicals industry – the largest producing nation in the EU – has already tracked a crash in production expectations for June.

Production prices across the 27-nation block have already shown significant increases since the start of the war in Ukraine, according to the latest information from the EU’s statistical agency Eurostat.

Data in the table below show the increase in production prices for chemicals producers compared to the same month the previous year.

Country/Region May 2022 April 2022 March 2022
Eurozone 35.6 36.4 34.1
Germany 29.2 29.5 27.1
France 46.3 45.1 42.7
Spain 27.9 30.9 29.1
Italy 23.6 23.9 22.3
EU 35.6 36.4 34.1
Poland 39.2 39.9 34.7
The Netherlands 46.4 51.4 45.7

This data is also reflected in the monthly price increases denoted by Eurostat.  Energy prices have been under pressure from the end of last year, driven by  tight supply, with further increases driven by the war in Ukraine, and congestion in supply chains which has not eased since the start of the pandemic.

Production in manufacturing fell for the first time in two years while overall new work orders fell in June for the first time in 15 months, driven by weakening demand, according to the PMI data.

“Overall, we think the outlook is deteriorating precipitously. Geopolitical tensions are not about to abate, and are likely to push gas prices up further, increasing inflationary pressures. Especially, the prospect of gas rationing is a clear risk to the outlook,” said analysts at Oxford Economics.

“This means that even if economic agents are ready and capable to pay more for their energy needs, the volume of energy available in the economy will fall short of meeting demand, leading to an inevitable halt in output. We think this risk is more likely to materialize during the winter months, when demand for energy is seasonally higher.”

Thumbnail picture: Shell’s Wesselin, Germany, oil refinery (source: Ying Tang/NurPhoto/Shutterstock)

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