Shale and hearty

At the end of the year, it is pretty much an automatic instinct to look back and ahead. Both CEFIC and the American Chemistry Council (ACC) have been doing this recently, with some markedly different results.

According to CEFIC, total year-on-year growth of chemicals output this year will be 2.0%. This is in line with the historical trend growth rate but much less than the 4.5% expected in June when there was greater optimism about a continuing recovery as 2010 had seen double-digit growth that continued into Q1. Expansion in 2012 will probably reach 1.5%, slow at first though accelerating later in the year, based on 1.0% projected GDP growth.

Consumer chemicals were the star performer in 2011, with growth of 6.6%. This is expected to fall to 2.5% this year, still the single largest. Pharmaceuticals are expected to see 2.0% growth in 2012 on the back of 3.0% in 2011. All other sectors, speciality chemicals included, are tending towards the average

This is the inevitable result of “heightened business uncertainty” – essentially the Eurozone crisis and high US government debt – which has led to a reduction in inventories and “inventory trimming”, as the increase in oil prices came to a halt, reducing the incentive to buy ahead. The end result, said CEFIC president Giorgio Squinzi, is lower output growth, though Europe retains its large historic trade surplus in chemicals.

The main risks are “perilously slow” growth in most developed economies and the possible backlash against austerity measures. Asia is still growing but asset bubbles are a risk. Company results have been reasonably good in Q3, however, so what is most crucial in Squinzi’s view is “an effective solution to the debt crisis, and deliver credible actions to stabilise markets and confidence”.

The ACC likewise sees a “more encouraging” outlook for the US chemicals manufacturing industry, despite a slowdown in the general recovery. It expects gradual improvement in 2012 ahead of a stronger market recovery in 2013, as most major end-use markets are also recovering.

Both organisations, notably, mentioned shale gas as a key factor for the first time. In the context of the high regulatory and social costs and high energy prices facing European chemical producers, noted shale gas development is attracting a new round of investment in basic petrochemicals, while Middle Eastern capacity build-up continues.

The ACC, more emphatically, said that access to vast, new supplies of natural gas from previously untapped shale deposits is “key to the domestic chemical industry recovery … After years of high and volatile natural gas prices, the new economics of shale gas are creating a competitive advantage for US manufacturers, leading to greater investment, job creation and industry growth,” it said.

A combination of this, high oil prices compared to natural gas and a weak dollar have greatly helped the US industry. Another consequence has been the emergence of a two-speed market. The oil and gas boom has created a boom in demand for chemicals, while light vehicles and aircraft are strong, construction recovering and those involved with business investment, including electronics, are still doing well. Textiles, paper and printing, among others, are weak. This is forecast to continue.

If the ACC is right, this could actually be the start of a fundamental shift in an industry dominated by Europe. Are they? As a European and one who believes that we have to wean ourselves off fossil fuels if we are to leave a planet fit for human habitation to our grandchildren, I hope not. But I wouldn’t bet on it….