OUTLOOK ’17: Uncertainty prevails in the European petchems industry

By Niall Swan

LONDON (ICIS)–It is beyond a doubt that 2016 will go down as one of the most turbulent but also most important years in modern times, not only in broad global terms but in the petrochemicals business too.

On 23 June, the UK voted in favour of leaving the EU, a decision which, despite repeated warnings, was one that very few believed would transpire.

Fast-forward to 8 November, and the US presidential election managed to trump the UK in terms of unexpected votes as real-estate developer and reality television star Donald Trump was elected ahead of Senator Hillary Clinton.

The impact of these two seismic events on the chemicals industry has yet to be felt with Trump awaiting his inauguration on 20 January, while Article 50, which allows the UK to leave the EU, will be triggered by the end of March, with two years of negotiations expected.

MERGERS & ACQUISITIONS
Elsewhere, there are major changes afoot in the chemicals industry, with three major mergers or acquisitions – worth an estimated $200bn cumulatively – in the process of being completed.

German agrochemicals major Bayer’s acquisition of US company Monsanto, Swiss-based Syngenta’s sale to Chinese state-owned chems company ChemChina, and the long-awaited merger of Dow and DuPont are all expected to be completed in 2017, leaving an entirely different industry landscape.

FINANCIAL PERFORMANCES 2016
Looking back at Q3 results across the industry does little to reassure that things will improve in the coming year.

BASF, the world’s biggest chemical company and one of the largest in petrochemicals, saw its net profit fall by 27% year on year in the third quarter of 2016 with sales also down by 20%.

In its Q3 statement, the German company said that it expects full-year sales to decline due to the divestment of its gas trading business, with operating profit before special items seen slightly lower compared with 2015.

 Covestro – which will shortly publish its first full-year results as an independent entity – saw a surge in third-quarter net profit, up 61.9% year on year to €259m, analysts questioned the resilience of the company in tougher conditions.

“After Covestro experienced strong tailwinds in 2016 [brought about] by lower raw material costs and the delayed start-ups of competitor capacities, raw material costs are rising significantly since mid-2016 and the delayed capacity additions are finally coming. Consequently, we expect that Covestro might see pricing power headwinds in 2017,” said Baader’s chemical analyst Markus Mayer.

Specialty chemicals producer AkzoNobel was another company whose Q3 results, despite being moderately positive, failed to inspire. Net profit was unchanged year on year at €285m despite a 4% drop in sales.

The Dutch company’s results were “roughly in line with consensus” according to analysts at Sanford Bernstein. Baader Bank were less kind, saying: “Our conclusion [is that a] 2% price decline in Q3 2016 underpins our fear that Akzo has not the pricing power to surpass rising raw material costs.”

In a year that saw weak oil prices on the back of over-production, a problem which OPEC wants to counteract with a production cut, major oil companies such as Shell and BP relied on their petrochemical segments to produce strong results.

BP’s petrochemical’s business posted a Q3 underlying replacement cost profit before interest and tax of $78m, over double the $37m posted the previous year, while Shell’s chemical operations posted a 2% year-on-year increase in Q3 earnings to $542m.

“[It is] hard to be very optimistic about the outlook. The first half of the year disappointed,” said Paul Hodges, chairman of consultants International eChem, in a recent blog post.

“Then Q3 saw major volatility as the hedge funds and high frequency traders played their games in the oil market – prices weakened as demand slowed, but then the story about another effort at an OPEC-Russia quota deal pushed oil prices back up again.”

This led to companies doing some out-of-the-ordinary stock-building during the summer months, said Hodges, but a lack of demand from the downstream end of the value chain took its toll.

“Of course, some companies still did relatively well – either because of luck, in being at the right place at the right time, or because they have a very robust strategy,” he added.

CAPACITY UTILISATION
Less-than-impressive financial results were coupled with faltering capacity utilisation, which dropped to the lowest level for the sector globally since the height of the recession in early 2009, according to the American Chemistry Council (ACC).

Global capacity utilisation in October of this year fell to 78.4%, which is just above the lowest reading ever seen of 77%, according to the ACC. What’s possibly more worrying, however, is that it says capacity utilisation has been in constant decline since the end of 2015, when it stood at 80.7%.

However, according to the latest European Chemical Industry Council (Cefic) Chemical Trends Report, capacity utilisation in the EU reached 81.9% in Q3 2016, which is a slight quarter-on-quarter increase suggesting that there is some light at the end of the tunnel.

FALLING CHEMICAL PRICES
Cefic also recorded that petrochemical prices in the EU were 8.5% lower in Q3 2016 than in the same period of 2015, while in the wider EU chemical sector, prices were down 4.6% year on year in the first nine months of 2016.

When taking all of the above into consideration, it’s likely that the most prevalent word analysts will be using for the European chemicals industry for the foreseeable future is ‘uncertainty’.

There was enough to be positive about in the second half of 2016 to suggest that the industry is heading in the right direction, but rising costs coupled with the disconcerting potential effects of both Brexit in the UK and Donald Trump’s policies leaves a sour taste heading into the new year.

Image source: Suzi Altman/ZUMA Wire/REX/Shutterstock