Economic Studies
Chemicals

Chemicals

Chemicals
Latin America
Northern America
Central & Eastern Europe
Western Europe
Asia
Mid-East & Turkey
Change sector

Strengths

  • Main input prices remain at historically low levels
  • Robustness of US demand
  • Specialty chemicals are less dependent on the economic situation

Weaknesses

  • Base chemicals performance strong dependence on the global economic cycle
  • Overcapacity in China in some segments
  • Increase in ethylene production capacity

Risk assessment

Highlights
NAPHTHA AND ETHANE PRICES

NAPHTHA AND ETHANE PRICES

The prices of the main inputs for chemical production (natural gas, naphtha) increased throughout 2018, putting pressure on margins, despite naphtha reaching its lowest levels in the past eight years. The relative prices weakness for the principal raw material, naphtha, continues to offer some respite for European producers. As chemical activity is dependent on economic cycle evolution, it has been on the rise, but is expected to decelerate due to softening economic conditions in most regions globally.

US petrochemical producers continue to benefit from a relatively cheap natural gas access. Nevertheless, ethane prices in the United States are increasing (+115% at end September since the beginning of 2018) due to stronger demand from ethylene derived products.

Low naphtha prices are also helping Chinese producers. However, the development of olefins manufactured from coal, which was promoted by the Chinese government due to its cost advantage, comes at a heavy price for the environment due to higher pollution.

Demand

Global demand for chemical products is expected to increase in 2019, but at a slower pace due to slightly sluggish global economic prospects.

In Western Europe, activity in the chemical industry will expand slowly as a result of the moderate expected economic growth (1.9% in 2019 versus 2.2% in 2018). Turnover in the European chemical industry grew by 4% year-on-year at the end of August 2018, after growing by 7% a year earlier. Nevertheless, most subsectors of the chemical industry activity should remain steady, thanks the automotive sector despite its challenges.

The demand for chemical products in North America is expected to keep growing in 2019, despite Coface forecasts that US GDP growth will decelerate to 2.3% (from 2.9% in 2018). Both automotive sales and construction activity in the United States will have a negative impact on demand. Sales of new light vehicles in 2019 will likely experience a 1% drop, as a result of higher interest rates, higher car prices and less favourable credit conditions. Moreover, home builders are cautious about land access, rising input costs, and overall diminishing affordability. The FED is expected to continue raising rates in 2019, putting more pressure on car and home buyers and thus offering lower prospects for the chemical industry.

Demand in China for chemical products is likely to be restrained in 2019, with a lower GDP growth rate in 2019 (+6.2%) compared to 2018 (6.6%). Private sector debt in China amounted to 261% of GDP at the end of March 2018 according to the Bank of International Settlements. The construction sector is no exception and suffers from decreasing activity, which will continue throughout 2019. Moreover, the construction has the highest ratio of ultra-long unpaid amounts exceeding 2% of annual turnover, according to the Coface 2018 China Payment Survey. Another important client sector for the chemical industry in China, the automotive sector, is not performing well either, with vehicle sales decelerating: they reached only +0.6% at end September 2018, after hitting 4.46% a year earlier. The Caixin/Markit Manufacturing Purchasing Managers’ Index (indicating China factories activities) at end September 2018 shows that growth in orders stalled as a result of a slowdown in export orders.

Supply

Crude oil and natural gas prices evolutions, notably rising trends, may impact chemical producers’ margins.

Lower European economic growth (+1.9% in 2019 after 2.1% during 2018) and higher expected average Brent price in 2019 (USD 75 per barrel) could adversely impact chemicals companies’ margins. Monthly averaged naphtha prices at end September increased by 17% since the beginning of 2018 (USD 675 per ton vsUSD 576/t). The aforementioned raw material price is strongly correlated to crude price since it is derived from it, and is widely used in the European petrochemical industry. European chemical producers’ net profit margins reached 8.5% in 2018 (up from 7.7% a year earlier). However, petrochemicals fared better than their specialty chemical counterparts (products sold on the basis of their function rather than their composition), an indication that margins were spurred by low raw input prices, as with naptha. Furthermore, oil price volatility is high, which is translated into higher naphtha price volatility, adding complexity and risks to chemical companies’ activities.

US domestic demand in 2019 is unlikely to provide opportunities for US ethane-based producers, as was the case in the past, as they are losing competitiveness compared to those using naphtha. Ethane price evolution at Mont Belvieu in Texas was 42 US cents per gallon in September 2018, versus 19.55 US cents per gallon at the beginning of the year: a 115% increase). US petrochemical producers are losing parts of their competitive edge they gained compared to European producers due to large access to cheap ethane coming from shale hydrocarbons. In addition, piling up of ethylene production capacity due to abundance of shale gas in the United States is exerting pressure to look for buyers overseas, notably China. At the same time, the current trade war is impacting a large swath of chemical products: China is applying tariffs ranging between 5%-25% to the majority of ethylene related products. US ethylene products will therefore likely head toward other regions such as Europe, Latin America or Southern Asia, as Chinese traders would buy more products from the Middle East or Singapore.

Chinese chemical production was down 1.9% YOY at the end of September 2018. Coface forecasts that Chinese economic growth rates will decelerate from 6.6% in 2018 to 6.2% in 2019. After reaching 7.3% in 2018, the net profit margin for Chinese companies is still lagging behind European figures (vs 7.6% a year ago). Many sub-sectors are crippled by overcapacities, which hamper their profitability. This is the case for polyethylene (PVC), where the capacity utilisation rate is around 60%, and methanol. In the medium-term, the increase in production capacity in olefins, produced via coal, may continue to dent the profitability of producers. Moreover, this technology requires significant consumption of water and capital and, above all, has serious environmental impacts, a sensitive issue in China. However, central authorities seem to be reversing their former plan to foster this kind of technology due to polluting effects.

 

Last update : February 2019

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