Market outlook: Europe chemicals face uncertain 2014 outlook

10 January 2014 09:47 Source:ICIS Chemical Business

Tepid macroeconomic growth is likely to make chemical industry executives take a cautious approach in 2014

To use an overused phrase in the industry, European chemical producers would be right to be “cautiously optimistic” heading into 2014.

The year of 2013 did not provide an obvious direction for the economy, and it is unlikely there will be big flashing road signs in 2014 either.

Market conditions seem to have stabilised, which many feel could be a base for a gradual recovery in Europe this year, but improvements in the economy have not been anywhere near strong enough to fill high-level decision makers with overriding confidence.

According to the European Commission Autumn 2013 economic forecast, published in November, real GDP growth in 2013 in the EU is forecast to be flat compared with 2012, and is expected to grow by only 1.4% in 2014. Unemployment is still a problem, with the EU jobless rate forecast at 11.1% in 2013 and at 11% this year.

Europe’s wider economic problems, and the huge petrochemical production cost differential with the Middle East and North America, can only weigh heavily on the companies trying to succeed in the chemicals sector.

Companies that are agile and ready to exploit opportunities will be successful

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The shale revolution in North America is exposing the production economics of ethylene and products such as polyethylene (PE) and polyvinyl chloride (PVC). European production can probably be made to work but profitability is clearly challenged by feedstock economics and Europe’s high energy costs.

Germany’s chemical employers group, Wiesbaden-based BAVC, said the industry is still waiting for a sustained recovery. The survey of 590 chemical companies, employing about 344,000 workers, showed that business keeps stagnating while costs are rising.

BAVC said that firms generally do not expect to see drastic improvements in profitability in 2014. On the contrary: 28% of the firms surveyed expect lower profitability this year while only 20% expect higher profits, the group said.

In fact, chemical companies see their cost situation worsening over the medium term, especially with regard to energy, labour and raw material costs, BAVC said.

According to trade group Cefic’s latest chemicals trends report, EU chemicals output for the first three quarters of 2013 decrease 0.7% year on year despite a rise in September, following a contraction in the first quarter.

Cefic did state that the EU chemical industry confidence indicator (CCI) it generates showed confidence in the chemical industry in November had improved compared with October, however concerns over output still remain.

“Current overall order books for the coming months contributed to the positive change. Production expectations for the months ahead registered a downturn in November, however, compared to October of 2013,” Cefic said.

On the back of this, it is expected 2014 will see chemical firms take safer options when choosing new strategy, or see companies focusing on the implementation of previously announced long-term strategies.

Germany-headquartered specialty chemicals company LANXESS has already begun implementing its ‘Advance’ efficiency improvement programme, announced in September 2013, to address the challenging economic situation. The company will cut around 1,000 jobs worldwide as part of a drive to achieve €100m efficiency savings from 2015 onwards.

France-based specialty chemicals producer Arkema in November reiterated that it will continue to implement its strategy to achieve group sales of €8bn and an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 16% in 2016. By 2020, the group aims to achieve €10bn in sales and a 17% EBITDA margin.

Arkema is becoming increasingly focused on specialities and there is movement towards a well-balanced geographic presence. The company has said it will place efforts on implementing its major organic growth projects, such as the construction of its Thiochemicals platform in Malaysia, its capital expenditure programme in Acrylics in North America, and its industrial developments in fluoropolymers and biosourced specialty polyamides in China.

Meanwhile, in the quarterly earnings report of Austria-based chemicals producer Borealis in November, CEO Mark Garrett said he expects the years ahead to remain challenging, and the company will continue to take steps to improve the competitiveness of its polyolefins and expand its presence in fertilizers.

The Borouge 3 cracker in Ruwais, a joint venture between Borealis and the Abu Dhabi state-owned oil company ADNOC, is expected to start up by the first quarter of 2014, with the rest of the downstream facilities kicking off in staggered formation during the course of the year. The start-up of the Borouge 3 project is expected to raise the company’s olefins and polyolefins capacity by 2.5m tonnes/year.

Meanwhile, Belgium-based producer Solvay recently announced it expects to deliver annual double-digit recurring EBITDA (REBITDA) growth on average in the next three years and to outperform the market while significantly increasing capital return. It has forecast it will reach REBITDA of €2.3bn-2.5bn by 2016, supported by changes in its business portfolio.

Solvay also said it plans to “selectively invest” €700m-800m annually through to 2016, with more than two thirds of these investments focused on consumer chemicals and advanced materials. In October, the company completed the acquisition of US-based privately-held Chemlogics for a total cash consideration of $1.35bn.

CEO of Germany-based chemicals major BASF, Kurt Bock, in November reiterated the company’s cautious outlook for 2014. He told journalists in London that BASF was not seeing the good upswing in volumes and prices that might give it more confidence in economic growth, but the company was still relatively optimistic.

“We are still highly uncertain about the course and direction of the economy,” Bock said, commenting on the still sober assessment of the outlook it had given on release of its third-quarter financial results.

“Maybe in some countries the recession is behind us,” Bock said. But the company had faced a strong headwind on currency and overall an average price decline in the third quarter, he added. “We are cautiously optimistic going into 2014,” Bock said, adding that BASF believes there could be some upturn in Europe next year and the US can continue to grow. “At least in our case, in China we have seen quite good volume development in 2013 and we have no reason to believe that 2014 will be worse,” he added.

Sentiment on the economy’s health in 2014 will a big driver on how brave European chemical companies will be when making decisions on investment and potential acquisitions. A wait-and-see approach will be the most likely strategy for the majority of players, but it is certain the ones to find success will be the companies that are prepared and ready to move when an opportunity presents itself.

Additional reporting by Nigel Davis, Tom Brown and Stefan Baumgarten

By Franco Capaldo