INSIGHT: Chemicals output falls as industrial activity contracts globally, 2023 expected weak

LONDON (ICIS)–It is not so much a question of how low will it go but how slow will it be – and for how long? Capacity utilisation data show that the chemicals sector globally has geared down in the face of current headwinds. And there are many of those.

The outlook is probably more clouded than it has been for years with longer-term trends overlaid by uncertainties that could persist not just for the next six months but through 2023 and possibly well into 2024.

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For producers and supply chains in Europe, the energy supply crisis brought about by Russia’s war in Ukraine is the critical present challenge.

Energy prices were surging before the invasion as most of the world emerged from the worst ravages on the COVID-19 pandemic and were elevated further by the war.

How Europe’s gas supplies and its electricity grids cope with winter demand is the key point, with energy-intensive industrial users among those facing the greatest uncertainty to add to the inevitable cost burden.

Inflation has hit consumption hard. Petrochemicals demand slumped in August and has not recovered, apart from some balancing of stocks.

Financial market analysts are expressing some improved economic sentiment but industrial sector and construction activity remain depressed.

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CHINA: GLOBAL IMPLICATIONS FOR CHEMICALS
The outlook for China’s economy dominates that for Asia and has global implications for chemicals.

Relaxation of the country’s strict COVID-19 lockdown policy is the greatest threat to the economy now given the possibility that spread of the virus could be extremely difficult to deal with if not overwhelming.

China’s increasing self-sufficiency in basic chemicals and polymers radically shifts export opportunities for foreign producers and puts strain on domestic markets with supply/demand balances pointing to oversupply.

Manufacturing in the US has had tough time of it, with automakers hit hard, although there has been a pull back towards pre-COVID levels of output.

The US manufacturing purchasing managers’ index (PMI) fell into contraction territory in November, at 49.0 points, down from 50.2 in October; any reading below 50.0 points marks contraction.

The US PMI for manufacturing had not been in contraction territory since May 2020, during the first wave of the COVID-19 pandemic.

The chemicals index fell for the third time in November and only six of 18 sectors showed expansion.

This is further bad news for US petrochemical and polymer producers that have bet on low-cost feedstock and energy capacity expansions and now have to contend not only with the impact of rising inflation on demand in the US economy but the slump in demand in China and globally.

US industrial production is expected to fall further, Oxford Economics said earlier in December, given weak global demand and the US Federal Reserve being more aggressive on tackling inflation.

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The balance may come from China producing more next year but industrial production globally is forecast to remain weak through 2023.

Oxford Economics has cut its forecasts for industrial production four times in 2022. Now it is forecasting a decline in industrial production in the fourth quarter this year that coincides with the expected global recession.

Industrial recovery is only likely to be slow next year, it says, even if recessions nationally are only relatively short-lived.

Insight by Nigel Davis