Chemicals: Risk

The moderate recovery that took shape in 2009 will continue in 2010 barring a new downturn in global industrial activity. Sector business will nonetheless remain far below pre-crisis levels.

Major purveyor of intermediate products to many industries, the chemicals sector, took the brunt of the impact from the sharp drop in global industrial activity in the closing months of 2008. Fortunately, however, the industry reacted quickly to the ensuing collapse of demand exacerbated by destocking and made drastic cutbacks in output thereby avoiding an excessively large drop in prices and margins. The fall of raw material prices also provided a cushioning effect. Many plants were idled and costs were cut.

With its direct exposure to sectors like automotives or construction, specialty chemicals suffered a sharp drop in demand, and in the absence of corresponding cuts in production prices declined considerably. The basic chemicals segment, however, benefited directly from the fall of raw material prices and was able to stem the decline of its sales prices by cutting back drastically on production. Overall, only a few very specific segments were able to continue to grow or limit their decline, thanks particularly to the concentration of production capacity and the strength of final demand: industrial gas, cosmetics, liquid crystal for flat screens, and, until the fall of agricultural raw material prices, plant-care products.

The downturn appeared to bottom out during the transition from 2008 to 2009. After stagnating at a low level in the 2009 first quarter, some signs of improvement appeared in the second quarter thank to the recovery in Asia. The slow improvement continued in the second half spurred by the more favorable economic trends in the European, American, and Japanese economies. Barring a new decline in the global economy, the trend is expected to stay on track in 2010, especially with stocks now very low. But sector activity will nonetheless remain far below pre-crisis levels. The modest growth of demand will moreover not facilitate passing on in sales prices to customers either the higher cost of raw materials or the costs associated with implementing environmental and health protection measures (carbon contribution and REACH directive).

Although the crisis affected the entire sector worldwide, it did not alter the pre-existing regional disparities, which will now return to the fore.

European chemists are hampered by the strong euro, overcapacity, and competition on petrochemicals from the Near & Middle East and on specialty chemicals from new Asian players. That competition is a significant factor in both domestic and international markets. And it will grow even more intense with new facilities going into operation in those regions.

Although faced with essentially the same difficulties, the sector's position in the United States is nonetheless relatively better in view of the dollar's weakness and the very low price of the natural gas relied on as a raw material alternative to oil. Both regions moreover benefit from the existence of chemical clusters that meshes perfectly with the way the industry operates with sales transactions mainly done between chemists.

Asian producers benefit meanwhile from a buoyant regional context, which Japanese chemists capitalize on through their exports.

And hydrocarbon producer countries benefit from the proximity of the raw material and fewer operating constraints. Middle Eastern producers are moreover geographically close to the large Asian markets where the development potential is greatest. They consequently attract global players that develop their local industrial presence to the extent permitted by local authorities.

Grading and description are forecasted for 2010. Updated on globalEDGE April 2010.