Chemical & Engineering News
December 15, 1997
Copyright © 1997 by the American Chemical Society

WESTERN EUROPE

Strong Exports Of 1997 To Slow And Growth To Moderate In '98

Patricia L. Layman
C&EN London

F or the chemical industry in Western Europe, 1997 has been marked by a strong resurgence in growth, fueled by exports. And although exports are expected to fall off somewhat in 1998- particularly to the currently beset markets in Asia-Pacific-the industry's forecasters still see a strong year ahead.

The official word from the Brussels-based European Chemical Industry Council (CEFIC) is that the industry is looking forward to 1998, because it expects macroeconomic growth in Europe to improve. But next year, domestic demand and investment should provide the main impetus for growth, while export growth rates will be moderate, according to CEFIC economists at the organization's annual Economic Conference, held at the end of November in Brussels.

The turnaround from several lackluster years came for the chemical industry in first-quarter 1996. By the middle of 1997, chemical production was rising at an annual rate of about 6%. With the U.K.'s economy somewhat out of sync with those of other Western European countries and with exports hurt by the strength of the pound sterling, the U.K. had a slackening in demand, CEFIC says. But Germany has resumed its historic role as the powerhouse of the European chemical industry, and solid growth also took place in France and the Benelux countries.

Also benefiting the industry was an improvement in new orders and a working down of unrealistically high inventories.

Simon de Bree, chief executive of Dutch chemicals firm DSM and a past president of CEFIC, was in good humor on behalf of the entire council when he opened CEFIC's recent Economic Conference: "It has been a good year, 1997."

According to Malcolm Mitchell, chief economist at BP Chemicals in London and chairman of CEFIC's Economic Outlook Panel, the industry is "set fair for this year and into next." Chemical industry output in 1997 is estimated to have grown 4.1% over 1996-which was up only 1.6% from 1995. Output in 1998 is expected to be similarly robust, up 3.5%.

He noted that the chemical industry's growth this year is actually closer to 5% if pharmaceuticals-historically the industry's strongest growth sector-are excluded. Growth in pharmaceuticals has decelerated "considerably," say CEFIC economists, over the past few years as a result of cuts in public health budgets, as European governments move to contain national health spending.

Production will slow after robust growth in 1997

Production graph

a C&EN estimates. Sources: European Chemical Industry Council, C&EN estimates

The main factor in this year's strong growth is exports, which were up 10% over 1996. The export performance reflected both the strength of the dollar- the European chemical industry's products were comparatively less expensive, hence more attractive-and sustained foreign demand, not just in the U.S. but also in the emerging economies of Central and Eastern Europe, Latin America, and, at least for most of the year, Southeast Asia. And even though exports are expected to taper off somewhat in 1998, they probably will still grow 6.5% or so from this year's level.

Dollar strengthened against European currencies

Dollar/currencies
graph

Source: International Monetary Fund

Moreover, the chemical industry's growth rates are expected to significantly outpace growth in gross domestic product (GDP) in Western Europe, estimated to be only 2.4% in 1997 over 1996, and up 2.5% in 1998.

According to Mitchell, the CEFIC Economic Outlook Panel made its forecasts on the basis of several underlying assumptions. First-at the top of everyone's list of current uncertainties-is the assumption that the fall-out from the turmoil in Asian equity markets will be sensibly managed. "The impact will not be negligible," he said, "but it will be limited. Moreover, global impact on asset pricing appears unlikely." The panel also assumed, he said, that there will be "no shocks" in commodity prices; that the European monetary union will proceed on schedule toward use of a single currency; and that economic and fiscal policies throughout Western Europe will not be excessively tight, but rather will be supportive of business.

Strong exports, which benefited primarily from the sharp appreciation of the U.S. dollar and the Japanese yen-both up more than 10% against other currencies in 1996-were not just a chemical industry phenomenon, of course. "Net trade has added 0.75% to European GDP growth this year," he said-a rate that is expected to settle down to more sustainable levels in 1998.

The way CEFIC's economic outlook panel sees it, exports have fueled inventory improvements, helping draw down stocks that had been abnormally high throughout 1996. That has encouraged a rebound in industry confidence and morale-there are "unambiguous signs pointing to recovery," Mitchell said.

Confidence in turn is leading to investment recovery. The German chemical industry's aggregate capacity utilization, for example, is nearing 90%, considered a" very high" figure. "It seems highly likely that [capital] spending will rise in 1998 through 1999," he added. "And investment will benefit employment, embracing the consumers of Europe. That will help relieve unemployment levels."

However, employment within the chemical industry itself is expected to continue to shrink, as there is "still considerable room for rationalization in Europe to run," Mitchell said. He cited statistics in the annual CEFIC "Barometer of Competitiveness" issued each year at the Economic Conference to indicate the region's problems, when compared with the industry in other regions such as the U.S. and Asia-Pacific.

1997 was buoyant year for most polymers in Western Europe

Polymers in Western
Europe graph

a C&EN estimates. Sources: Association of Petrochemicals Producers in Europe, European Council of Vinyl Manufacturers

Chemical industry profitability-operating profits as a percentage of sales- has traversed sharp troughs and peaks over the past few years. The highest profitability figure-17%-has been made possible only by massive commodity-chemical restructuring, CEFIC officials say. According to the survey, "No less than three-quarters of layoffs in the EU [European Union] chemical industry over the years 1990 to 1996 occurred in industrial chemicals, which accounted for half of the employment in 1990. Ensuing progress in hourly labor productivity went from 75% of U.S. levels to 86%."

On the other hand, according to statistics in the barometer survey, there is a clear need to boost productivity in the manufacture of consumer chemicals (such as detergents, paints, and adhesives) and pharmaceuticals in Europe." Hourly labor productivity currently amounts to only 72% of U.S. levels for those two branches together and has not shown any significant relative progress since 1990," the study said.

"Labor accounts for about 20% of the industry's costs," said Mitchell. "Productivity in Europe is about two-thirds that of the U.S. Hourly rates are higher, and U.S. workers work about 20% longer hours. Progress [in Western Europe] is being made-there have been substantial improvements in chemicals."

With improvements coming from industry actions such as exports and inventory corrections in 1997, similar benefits are expected to taper off next year. Along the way, "the baton will be passed to the consumer," Mitchell pointed out.

However, whether consumers cooperate or not remains to be seen. Indeed, among the possible downside pressures that could affect its forecast for 1998, the CEFIC economic outlook panel acknowledged that consumers may not begin spending the way the panel expects.

Another potential problem could be misguided economic policies-countries' governments could put in excessively stringent monetary policies to control inflation, for example. And at the top of the downside-pressure list: deflationary forces from Asia. Said Mitchell, "I think this can be countered. But the powder keg has been primed, and if it is mismanaged, the effects could be substantial."

On the other hand, some industry executives believe that there could be long-term benefits from the Asia-Pacific economic crisis, because marginal, uncompetitive operations-both existing and projected-will be forced to face up to economic realities. Any shutdowns resulting from the economic crunch would only benefit the stronger, more economic operations throughout the world.

Although the prospect for the upcoming year or two is a pleasing one, executives in the industry are not taking potential problems casually. For example, Peter Vogtländer, president and chief executive of Montell, observed at the conference, "I am pessimistic about profitability: because of overcapacity in the U.S., chemical companies there will have to export their surplus capacity, and they will be able to do it, despite the strong dollar. That will probably depress prices in the export market. [The economic crunch in] Asia-Pacific will affect demand, so there will be a supply/demand imbalance."

European economy will pick up slightly in '98...

European 
economy graph

...and most countries will see improvements

European economy graph

C&EN estimates. Source: European Commission

In fact, pricing remains an area of intense concern for the industry, which has lived with low profit margins over the past few years. According to CEFIC economists, chemical prices within Europe improved in 1997 to the point of showing overall modest growth of about 1%.

The economists attribute that improvement to price increases for exports outside Europe. Official European Union statistics through May 1997 indicate a growth rate for exports to countries outside the EU of 6% in volume, but 12% in value. Extra-European exports of chemicals currently account for as much as 22% of sales of EU chemicals, as compared with 18% in 1990.

And although the European chemical industry's percentage of exports going to Asia is relatively low-in 1996, approximately $25 billion, 4% of total chemical sales of about $635 billion-it is still clearly important. Hence the concern over uncertainty about prospects for the Asia-Pacific region.

According to Mitchell, the CEFIC panel factored into its forecast assumptions that the economic crisis in the region would shave 2 to 3% off GDP growth in Asia-Pacific countries. GDP growth there has historically been about 7 to 8% per year, so that is expected to drop to 4 to 5% per year. Any greater deterioration would certainly affect domestic demand and imports into the region. The "crucial area is China," he added. "If it stays 'whole,' the story remains reasonable."

"We believe that there is huge uncertainty over the outlook for globally traded commodities such as bulk plastics and engineering plastics" as a result of the financial crisis in Asia, Salomon Brothers' chemical analysis team states in a recent report on the subject. Encouragingly, however, the team adds, "We believe the areas little affected are the life sciences- pharmaceuticals and agrochemicals- and some specialty chemicals, where there are barriers to entry and which in general benefit from lower raw material costs in a commodity cyclical downturn.

"The primary potential implications of the Asian economic slowdown and currency crisis on European chemical producers are lower earnings, because of currency translation, and earnings growth for companies exposed to that region," the Salomon report notes. However, it adds, "it is difficult to reach a firm conclusion on the financial impact, as many of the companies price in U.S. dollars and have local production and therefore potentially benefit from lower local costs, which could boost margins."

With the resurgence in the German market, however, European chemical marketers are seeing dramatic results on their financial records.

Fiber production down, especially acrylics

Fiber production graph

a C&EN estimates based on nine months' data. Source: CIRFS (International Rayon & Synthetic Fibers Committee)

For example, Gordon Campbell, chief executive of London-based specialty- chemicals producer Courtaulds, noted that the company's sales of coil coatings in Germany increased 26% for the first half of the fiscal year ended Sept. 30." Part of that is from our market share going up," he concedes, "but you don't get that kind of increase in market share in a stagnant market. Germany is now 25% more competitive than it was a year ago versus the U.S. dollar and the British pound. The German economy is in good shape, and if it isn't, it should be: [The Germans] are too efficient not to take advantage of that."

Manfred Schneider, chairman of German chemicals producer Bayer, notes that "for the remaining weeks of the year [1997], we anticipate continuing high demand and, in particular, a gradual improvement in what remains an unsatisfactory price situation." In fact, he sees the possibility of pushing the chemicals price index-which has been stagnating in Germany-up a percentage point or two.

Petrochemicals showed strong growth in 1997

Petrochemicals graph

a Data before 1995 exclude propylene from refineries not owned by companies with steam crackers. b C&EN estimates based on nine months' data. Source: Association of Petrochemicals Producers in Europe

For 1998, he predicts chemical growth in Germany will be proportional to the expected GDP growth of about 2.4% over 1997. Bayer's economists are forecasting on the conservative side, according to Schneider, in contrast to the more bullish politicians in Germany who say growth will be a bit higher.

Schneider's counterpart at BASF, Jürgen Strube, expects a strong year ahead in 1998. He is also more optimistic about a German economic upturn than Schneider is-but with a caveat.

According to Strube, the chemicals and plastics businesses at BASF in general will be boosted by better demand throughout the company's market areas in 1998 and possible growth in sales of 3%, rather than 2%. Currency fluctuations play an important role, of course: "You must keep these in mind-not just the dollar, but also U.K. sterling. Currency will have a significant development on sales," Strube says.

In general, however, he believes that" there are opportunities for stronger growth in Germany and Europe in the next year. In Germany, there is a revival of hope that we can keep pace with the dynamism of the world economy."

Trend continues downward in chemical employment

Chemical employment graph

a Data for 1991 and following years include former East Germany. b C&EN estimates. Source: European Chemical Industry Council

That's when Strube's caveat kicks in, however: "The problems that will continue-in consumption-stem from lack of confidence in consumers. If we ask the question about consumer confidence here in Germany, we would have to say there is no reason to assume consumers feel confident yet. But restructuring in Europe has had a positive impact on imports and greater competitiveness. Changes in currency boosted that.

"There is a major probability that, in 1998, we all will be more competitive and have greater ability to export, and that will boost business," adds Strube. "It will be more difficult for companies only in local markets, or selling to consumers. But chemical-to-chemical sales will be good."


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