Sharp dip in current chemical demand and profitability
Chemical industry confidence in current order book volumes and profitability compared with 12 months ago has fallen substantially since May, analysis of the Europe ICIS June Chemical Market Confidence Index (CMCI) published on June 28, 2016
Views on profitability compared with 12 months ago were already negative last month, but further tumbled in June – a reflection of the continued impact of volatile global trading conditions and financial uncertainty across the chemical industry. Despite this, there has been an increase in confidence that order book volumes and profitability will continue to grow over the next 12 months, showing a persistent optimism from chemical companies over their ability to navigate future conditions.
In addition, all indicators except profitability compared with 12 months ago remain in positive, despite declines in several of the indicators.
The rise in order book volumes mirrors an upward revision to Eurostat’s first-quarter eurozone GDP growth on the back of increased household spending, an upward revision in the European Central Bank’s (ECB’s) June forecast for 2016 European growth to 1.6% from a 1.4% estimate in May, and the 33rd straight monthly rise in EU passenger car sales in May (according to the European Automobile Manufacturers Association (ACEA)) and just shy of a return to pre-global economic crisis levels last seen in May 2008.
Firming expectations of higher profitability in the next 12 months may have been giving a further boost by a period of seemingly more stable oil prices back at around a USD 50/bbl level.
Nevertheless, the UK’s referendum vote to exit the EU has triggered financial uncertainty across Europe and destabilised stock, currency, and crude oil markets – at least in the short-term.
It is unclear what role the so-called Brexit vote played in the fall in confidence in future business conditions, as the index was collated in the week preceding and in the immediate aftermath of the vote. Although it is likely that it played a role for some players in their views in confidence at the end of the week, it is too early to see the full manifestation of the impact.
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It is producers which have seen the largest fall in confidence since May, with a decline in all indicators except for confidence in order book volumes in the next 12 months, where confidence in an increase has risen.
The sharpest fall off in producer confidence was in expectations of increasing profitability in the next 12 months, which although still in positive territory has seen a 17.2 point fall since May, corresponding with a similar sized growth in buyer expectations of increasing future profitability in the next 12 months – suggesting a dramatic shift in the dynamic from a seller’s market to a buyer’s market in the past month.
Traders and distributors have also seen an increase in profitability expectations for the next 12 months, meaning that producers have moved from the most confident persona type on rising future profitability to the least confident in the space of a month.
Most of the confidence, it appears, has been lost in the intermediates segment of the chemical chain, which was the most buoyant on profitability last month.
Intermediate confidence in future profitability has fallen by 12.5 points since last month, while confidence in future profitability among building block chemicals has risen sharply moving the Index from negative in May to strongly positive in June, and there has also been a marginal rise in confidence in future profitability among downstream markets. This may be linked to fears over producers’ ability to pass through firmer crude oil prices in recent weeks weighed against buyers’ growing confidence in increased GDP and higher consumer purchasing power, while producers at the top of the chain are seeing the benefits of higher recent stability.
It may also be linked to some movement in expectation late in the week over the potential power shifts and change in macroeconomic dynamics caused by the Brexit vote, although, again it remains too early to isolate any real impact from the UK referendum and the immediate instability it brought into the market on Friday 24 June, when the confidence index data was still being collated. Coupled with this, crude oil prices have once again become volatile in the wake of the referendum, with WTI futures losing 6% of their value between the settlement on Thursday 23 June and June 25, 2016.
The newly established ICIS Europe CMCI aggregates sentiment from hundreds of petrochemical market players actively involved in price negotiations across more than 60 different markets.
The Europe CMCI runs from +100, to -100, with zero on each index representing neutral, or uncertain conditions, a negative score indicating bearish expectations and a positive score representing bullish expectations. The indexes also gather sentiment on the comparison between the current situation and the situation across the past 12 months to give a complete picture of current market conditions and confidence. The information is gathered in the third week of each month. A full methodology is available on request.