Specialty Chemicals Growth in 2010 Will be Modest and Uneven and Led by China

Summary

Signs are emerging in the specialty chemicals value chains that show an overall improving global economy, but one with unevenness by region and by economic sector.  Our indicators show China leading all regions in 2010 growth while manufacturing will lead all sectors.  Lagging will be housing and the regions of North America and Europe.

Analysis

Specialty chemicals serve as a useful leading indicator of macroeconomic growth since they are used broadly in the building and maintenance of homes, buildings and infrastructure as well as in the manufacture of durables, consumer products and capital goods.  A case in point is paints and coatings, which are the largest segment of specialty chemicals valued globally at $US 86 billion in 2008.

Our firm is has developed a forecast that will be presented at the TZMI Titanium Conference 2009 in Singapore this week that shows demand for coatings falling 6.8% globally for 2009 but growing at a modestly robust 5.1% in 2010.  Housing (new construction and existing homes/buildings) consumes 60% of paints and coatings, manufacturing another 27% and infrastructure and automotive maintenance make up the last 13%.  To the extent that that these segments represent broader economic conditions, one can infer that the global GDP will be somewhere near 5% in 2010.

However, 2010 growth will be uneven:

• The Asia region, and specifically China, will show the greatest growth of paints and coatings with growth at 7%.  This reflects a strong building and construction sector as well as a recovered manufacturing sector poised to capitalize on exports to improving consumer spending in North America and Europe.
• Manufacturing will lead the segments with growth of 6.9% as the automotive, durables and capital equipment markets recover.
• Housing (both new construction and existing homes) will lag with only modest global growth of 4% drawn down by slow improvements in North America and Europe which will show local growth of 3-4%

Still, uncertainties and risks remain including:

• The recovery rate of new construction and existing home turnover in North America and Europe.  Our forecast assumes a very modest recovery, but without that recovery, 2010 GDP could be 1% point lower.
• The impact of stimulus spending, particularly in the US, where the impact has yet to show in specialty chemicals demand in a meaningful way.  At this point it appears the effect will be diffused as demand is spread over the next two years and not be a major contributor to 2010 growth.
• The steady-state base demand for automobiles once the effect of "clunkers" has cycled through all regions.
• Re-stocking and the willingness of businesses to build specialty chemicals inventories toward pre-recession levels.

Nonetheless, specialty chemicals demand and market conditions seem to suggest we have moved through the bottom of the recession and are on the climb up as we enter 2010.