INSIGHT: Global manufacturing continues to expand in March

LONDON (ICIS)–Encouraging global manufacturing news this week included signals that new orders and output are continuing to expand as industries pull out of the lengthy trough.

World manufacturing output increased in March for the third successive month, a sub index of the JP Morgan Global Manufacturing PMI indicated. The rate of growth accelerated to a 21-month high. The new export business trend improved and, while the index showed continued contraction, it did move closer to stabilisation with contraction at a similar pace to that shown in June 2022.

The global manufacturing purchasing manager’s index (PMI) stood at 50.6 in March from 50.3 in February climbing to its highest reading since July 2022. Overall operating conditions have improved in each of the past two months, JP Morgan and the index compiler, S&P Global said.

Chemical producers are in desperate need of demand growth as they seek to raise operating rates and respond effectively to the inevitable pull away from the downturn. Anticipating the pace of recovery is all important if profitability is to be underpinned effectively.

Manufacturing growth has accelerated in the US and China although India led the rankings in March. The euro area is improving but remains a drag on the global rating. JP Morgan still talks of the steep downturn in Germany and Austria, a further contraction of manufacturing in France and a fresh decline in Ireland.

Europe’s struggles to match output to demand were particularly tough last year.

Data from Germany’s VCI show that Europe remained hardest hit by the global industrial crisis. Production was lowered in almost all industrial sectors. Consumer facing industries were hit by weak consumer consumption and higher interest rates impacted the capital goods and construction industries.

In response to weaker demand regionally and globally and, particularly in the face of the energy crisis brought on by Russia’s invasion of Ukraine, European chemical producers have been forced to cut back.

The VCI data show that chemicals production in the EU was moving sideways from 2020 and that production was reduced in 2022 because of much higher raw material and energy costs.

2023 brought little relief because of the demand downturn and certainly no turnaround towards the year end. “Production stagnated at a low level. A dynamic recovery cannot be expected,” the VCI said in March. It also noted at the time that demand was falling to a low level because of global weakness in industry, so the shift to manufacturing industry growth globally comes as welcome news.

Unfortunately, the times when European chemical producers could look forward to taking full advantage of global industrial growth are probably in the past. Sector companies operate in a high cost environment which puts them at a competitive disadvantage compared to producers in other parts of the world.

EU chemicals trade with the world’s largest consumer and producer of chemicals, China, was growing until 2022 but has declined since. Meanwhile China chemicals trade with Europe grew strongly from 2020, peaking in 2022. The chemicals trade balance turned negative in 2021 and was most strongly negative on a segment basis in 2022.

The polyolefins picture is different with northeast Asia an important market for product from the EU plus the UK, as ICIS Supply and Demand Database information shows.

But, as China continues to add capacity and moves towards much greater self sufficiency, the trade picture can be expected to change with opportunities diminishing.

Splitting out petrochemicals the situation looks worse, although the EU trade deficit in petrochemicals with China retracted last year. Additional production capacities in China and relative domestic demand weakness had opened up opportunities for export to Europe while European prices remained relatively high.

Europe will struggle to regain lost trade with the more dynamic industrial economies given its still-high cost base. The build up of capacities globally for some products put producers operating in high cost environments with older facilities at a distinct competitive disadvantage.

If global manufacturing can continue in an expansionary phase and if more parts of the world move into that phase, then chemicals will benefit. The more cost efficient producers, however, would be expected to benefit disproportionately in the early phases at least of this industrial expansion.

Insight by Nigel Davis

ICIS Supply and Demand Database trade data visualisation by Yashas Mudumbai and Miguel Rodriguez-Fernandez