Global economic headwinds, tailwinds swirl for chemicals outlook

A series of headwinds and tailwinds are swirling in the global economy, making for an interesting mosaic of a backdrop for the chemicals outlook. Despite the renewed downturn in crude oil prices, most global economic indicators are pointing to continued growth.

Oil is now in bear market territory, with prices down more than 20% from their 52-week high. Petrochemical prices can widely be expected to fall in tandem. Prolonged weakness in crude oil, as long as global economic activity holds up, would improve the economics of naphtha cracking, predominantly in Europe and Asia, while eroding the competitiveness of US ethane-based petrochemical players.

Earlier in June, the Chemical Volume Proxy (VP) indicator put together by Investec analyst Paul Satchell, had already rolled over into negative territory in all regions – the US, Europe and Asia.

“We take this as a clear sign that chemicals purchasers are choosing to destock, given a generally bearish environment for oil prices. This is precisely the behaviour which should be expected, particularly given a period of stock-building during Q1 2017,” said Satchell.

The analyst expects the oil price to be the dominant issue for basic chemicals demand for the rest of 2017.

However, the core issue for crude is clearly a supply glut rather than a breakdown in demand. US shale-based producers keep pumping along with other non-OPEC countries such as Libya and Nigeria.

GLOBAL ECONOMIC ACTIVITY

Global economic activity is actually quite healthy, with economists forecasting stronger growth for 2017 and 2018.

Bart van Ark, chief economist at The Conference Board, sees “strengthening tailwinds” in the global economy through 2017 even amid elevated levels of uncertainty arising from “a volatile and unpredictable US policy environment, clouded Brexit negotiations and the need for reform of European institutions”.

The chief economist of the global business and research association spoke at a media briefing in New York on 12 June. He forecasts global GDP growth rising to 2.9% in 2017 from 2.5% in 2016.

“It is too early to tell if that cyclical uptrend will take us beyond 3%,” said van Ark. Limiting factors include slow growth of labor supply in mature economies on demographic factors, and lack of productivity growth.However, in the near to medium term, the Conference Board’s Global Leading Economic Index (LEI) points to a “significant cyclical upswing” in the world economy, led by the emerging markets.

In the US, most economic indicators such as consumer confidence, the Manufacturing Purchasing Managers’ Index (PMI), CEO confidence, non-residential investment in equipment and the unemployment rate are pointing in a positive direction, van Ark said. Still, he expects relatively slow US GDP growth of 2.2% in 2017 and also 2.2% in 2018. US GDP growth was 1.6% in 2016.

EUROPE MORE ROBUST

In Europe, similar indicators are “pointing to a widespread recovery”, said van Ark. European chemical trade group Cefic is more upbeat than it’s been in many years, expecting “robust chemicals growth” in 2017. “Robust” is indeed relative, as the group’s 1.5% production growth forecast for 2017 is a leap from 0.5% growth in 2016.

Europe’s chemical exports markets have developed well, as “global economic sentiment improved significantly, driven among other things by solid growth in China”, Cefic said in its mid-year report. Credit ratings agency Fitch sees world GDP growth of 2.9% in 2017, and peaking at 3.1% in 2018 – the highest rate since 2010.

Fitch chief economist Brian Coulton said the faster growth expected in 2017 reflects a synchronised improvement in market economies, both developed and developing. “Macro policies and tightening labour markets are supporting demand growth in advanced countries, while the turnaround in China’s housing market since 2015 and the recovery in commodity prices from early 2016 has fuelled a rebound in emerging market demand,” said Coulton.

However, Fitch expects China’s GDP growth rate to slow further from an expected 6.5% in 2017, to 5.9% in 2018 and 5.8% in 2019, as the government tightens credit growth.

Additional reporting by David Haydon in Houston and Nigel Davis in London