Forecast gloomy for chemicals

C&I Issue 1, 2012

Manufacturing recovery in Western Europe and the US has weakened and in some sectors stalled altogether, while rising unemployment and job insecurity is undermining consumer demand. The spectre of a credit crunch has returned to haunt parts of Europe, while the entire eurozone is gripped in the jaws of a banking and national debt crisis for which a detailed and credible escape plan has yet to be fully agreed, much less implemented.

These factors, and others, have prompted several respected economic forecasters – in both public and private sectors – to concede that a double-dip economic recession in Europe in 2012 is a very real possibility. The latest economic forecast from analysts at Standard Chartered Bank predicts that gross domestic product (GDP) in the eurozone will shrink by 1.5% in 2012, with Britain little better at minus 1.3%. Standard Chartered expects the British economy to have grown by only 0.7% in 2011 and to stumble into a decline of 0.9% Q1 and 0.5% in Q2 of 2012.

‘It will be both a tough domestic and external environment,’ says Gerard Lyons, the bank’s chief economist and head of global research. Standard Chartered now expects world economic growth to slow to just 2.2% compared with its 2011 expectation of 3%.

With dark storm clouds over Europe, the US struggling to escape from the clutches of a double-dip recession and the economic miracle in China and India beginning to look a little less miraculous by the day,  it is no wonder that chemical industry associations have been downgrading expectations for 2012. The European Chemical Industry Council (Cefic) now expects chemicals output growth of just 1.5% for 2012, down from the 2.5% forecast only six months ago. The Council’s economic outlook team has also slashed its forecast for 2011 growth for chemicals to 2% from 4.5% in June 2011.

Cefic president Giorgio Squinzi explained that the continuing eurozone debt crises and high US government debts have undermined macroeconomic sentiment since the summer. The Council believes that renewed doubts over banks’ ability to extend credit as they strive to meet higher capital reserve requirements will put increased value on companies’ internal cash flows.

‘Companies are hoarding cash,’ says Squinzi. ‘The uptrend in oil prices has halted, reducing the incentive to buy ahead. Added to this is increased business uncertainty, which is encouraging reductions in inventories. Lower output growth is the inevitable result.’

Cefic believes that consumer chemicals will be the top growth sub-sector this year at 2.5%, down from a forecast growth of 6.6% last year. It expects growth in the other main sub-sectors to be around the forecast average of 1.5%, although pharmaceuticals output is forecast to reach 2%, compared with 3% in 2011.

Cefic’s less than rosy outlook is based on the underlying assumption that European gross domestic product (GDP) growth will be 1% this year, down from the 1.8% it predicted in June 2011. However, this is wildly optimistic when set against forecasts from Standard Chartered Bank, the IMF and several other respected economic forecasters.

In December, 2011, Standard Chartered forecast that eurozone GDP would shrink by 1.5% compared with 2011. If this gloomy prophecy is correct, Cefic’s latest hopes for European chemicals output growth could, once again, prove hopelessly wrong. In recent years, Cefic has frequently been forced to revise substantially its forecasts of European chemicals output within six months of making them.

Cefic does concede, however, that the risks to its forecast of European economic growth are on the downside. Growth in most developed countries remains perilously slow and austerity measures are provoking political protest, it warns. Developing Asian economies continue to grow, but asset bubbles there could deflate suddenly, it adds.

Squinzi also makes the oft-repeated observation that European chemicals producers continue to suffer from high regulatory and social costs plus high energy prices.

Although some independent forecasters see world energy prices easing in response to slowing economic activity in the West, concerns over political stability in Iran, Iraq, Libya and Syria may keep global crude values at over $100/barrel.

Standard Chartered sees 2012 as a year of a two-speed global economy. The bank, which recently topped a ranking of 354 global firms for the accuracy of its economic forecasts over the past two years, sees a slowing global economy in 2012, with a fragile West and a resilient Asia, Africa, Middle East and Latin America. The mounting crisis in the advanced economies is expected to cause US growth to remain below-trend at 1.7%, it says.

Standard Chartered’s expectations of a significant slowdown in global economic growth during H1 2012 are pinned firmly on the crisis in the West. Lyons explains: ‘This points to the continuation of a two-speed world where a fragile West contrasts with a resilient East. It is a divided and disconnected world economy facing major policy dilemmas. Yet, no region is fully decoupled from events elsewhere. During the first half of 2012, problems in Europe and the West will weigh on global growth. By the second half, stronger growth across China and other emerging economies should pull up worldwide activity. It will be a recovery made in the East and felt in the West. If ever one needed to illustrate the shift, in the balance of power, this is it.’

The bank forecasts that Asia’s GDP growth will slow to a still-robust 6.5% in 2012 from 7.3% in 2011. China is expected to cool significantly in the first few months of 2012 before rebounding, helped by a major policy boost. As a result, China’s growth will decelerate from 9.2% to 8.1%. The bank expects growth in India, Asia’s third-largest economy, to accelerate mildly to 7.4% in the fiscal year starting 1 April 2012, from 7.0% in the current financial year. However, Indonesia, South East Asia’s largest economy, is forecast to slow to 5.8% from 6.5%.

The American Chemistry Council (ACC) is almost equally worried about the parlous state of the world economy and its impact on the chemicals industry. In its annual outlook, the ACC says the global economy entered a critical state in 2011 as the pace of recovery slowed under the influence of higher energy prices, disasters in Japan and the eurozone crisis. It believes that US economic growth will not reach long-term trend levels until 2013, with the likelihood of another recession high.

Economists at the ACC are particularly concerned by the slowdown in overall US manufacturing growth, traditionally the biggest driver of chemicals demand. US chemicals output growth is expected to slow from 1.9% in 2011 to 1.2%. Excluding pharmaceuticals, US chemicals production is forecast to rise by 1.6% against 3.8% in 2011. Consumer products and specialties are seen as the most resilient US chemicals sub-sector in 2012, with output seen expanding by 2.5% and 3.4% respectively. ACC believes that US chemical exports will continue to grow, but added that deliveries to Europe have evaporated as recession stalks the eurozone and reverberates around the world.

The ACC forecasts that chemicals output by volume in Western Europe will rise by 1.1% down from 2.5% in 2011. However, it sees German output growth slumping to just 0.3%, from 4.7% in 2011 and French production halving from 3.7% to 1.6%. Russian and Central/Eastern Europe chemicals output growth is expected to continue to outpace the West, at 4.5% against 5.3% in 2011.

Asia-Pacific chemicals output is forecast by the ACC to rise by 6.8% up from 6%. China remains the main driver of Asia-Pacific chemicals growth, with output forecast at 10.2% – down slightly from the forecast 11.1% rise in 2011. Total world chemicals output is expected to grow by 3.6%, little changed from the forecast 3.5% seen in 2011. But the lion’s share of growth is seen as coming from the developing world, at 6.2% compared with just 1.6% in the developed economies.

While virtually no-one in Europe and the US sees anything other than a decline in chemicals industry growth during 2012, especially in the first two quarters, opinions on prospects for a return to trend growth are mixed. Much will depend on the ability of the EU to resolve the eurozone banking and national debt crises, political stability in the Middle East, continuing rising demand in China and India, and a recovery in employment and general economic growth in the US.

None of these laudable objectives can be taken for granted, and must remain hopes rather than expectations. Thus the medium to longer term outlook for a fuller recovery in chemicals production in Europe and the US in 2013 and beyond must also be uncertain.

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