Summary
2010 should be a better year for the chemical industry, as demand grows in line with a recovery in global GDP. But a quick V-shaped return to the 2003-7 Boom years in terms of volumes/margins seems unlikely.
Analysis
On a global basis, chemical output is now back at 2006 levels, having lost 3 years of growth. If global GDP now grows at 2.5% - 3% in 2010, then demand from key sectors such as construction/housing, autos and electronics should improve next year. But there are a number of potential bumps in the road ahead:
- The impact of government stimulus measures will make forecasting very difficult. The end of specific measures will cause major falls in perceived demand, whilst new stimuli will create short-term upward fluctuations. Companies will require excellent supply chain management, and investors will need to keep a very careful eye on underlying trends.
- Equally, major amounts of new capacity, planned during the Boom years, is now starting to come onstream in the Middle East and Asia. This is primarily focused on the petrochemical and polymer sector, and will create significant pressure on margins.
- The expected recovery in demand will strain cash-flow at many companies, particularly given the underlying fragility of large parts of the banking system. CFOs will need to maintain robust monitoring mechanisms, and be prepared to keep customers on 'cash before delivery' terms if they have grounds for concern.
- Oil prices are likely to remain volatile in 2010, as financial markets continue to link oil and US$ positions. Recently we have seen an 82% inverse correlation between them. Underlying supply/demand balances may well remain weak in 2010, however, in spite of the expected economic recovery.
- Unemployment seems set to become a key political issue in the West. Arguments about the 'export of jobs' will therefore increase, and lead to a rise in anti-dumping activity. In turn this will cause job losses in emerging economies. Investors will need to keep a close eye on the political arena, and the potential for a rise in protectionism.
Overall, 2010 seems likely to be a transition year. Full economic recovery is unlikely to take place much before the 2011/13 timeframe. But the return of economic growth will offer investors the opportunity to identify likely future market needs. Those who focus on these new trends, rather than simply hoping for a quick return to former Boom conditions, will reduce their risk of disappointment. They will also position themselves to generate above-average returns as full economic recovery takes place.
Paul Hodges consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
