Chemicals are set to recover, but must court investment

The chemical industry's prospects are set to improve in the coming year, according to BP's chief economist - but it's going to be a long haul.

Speaking in his capacity as chairman of the CIA's business and trade board, Malcolm Mitchell told the association's business outlook conference that production volumes will begin to rise in the second half of this year, ahead of a recovery in 2003.

Currently, Mitchell said, chemical markets are using up stockpiles of their feedstocks. 'I don't think we can say yet that stock reductions have come to an end,' he said, 'but at least the process is slowing, and in the next couple of quarters it could become the single most important engine for growth.'

The turnaround amounts to a switch from the performance of the previous year, which Mitchell referred to as 'synchronised sinking.' Last year's performance was appalling and utterly against predictions, Mitchell admitted. He and his fellow forecasters overestimated economic growth in Europe by a full percentage point, and chemicals production by more. The actual picture saw chemical production dragged down by a 2 per cent shrinkage in the German economy.

The effects of the 11 September attacks worsened the situation even further. 'Taken together, 2001/2 represent the most serious global slowdown in more than 50 years,' Mitchell said. 'And because of the weak start, annual growth this year is likely to be only around 1 per cent.'

So is it possible that the industry can go from synchronised sinking to synchronised swimming? Mitchell thinks so, and confidently predicts that the turnaround will come in the middle of this year. Energy costs are unlikely to change much after their steep rise in 2001, so inflation should cease to be a factor. This will lead to a relaxation of fiscal policies in the major markets, most of which are already fairly supportive of the needs of the chemical industry. 'The total policy package in the US is almost unparalleled and worth perhaps 2.5 per cent of growth this year,' Mitchell commented. 'I wouldn't be surprised if global production was rising at 5-6 per cent by the fourth quarter of 2002.'

This translates to good news for chemicals, Mitchell said. And it's about time. 'We felt the impact of the downturn much earlier than other industries, because the traditional demand drivers - industrial demand and international trade - have been weak.' In the US, production slumped by 3 per cent, although this was offset by 1 per cent growth last year, mostly due to a recovery in gas prices and the resilience of the pharmaceuticals sector.

Growth next year is likely to be of the order of 1.3-1.5 per cent. 'Neither of which looks particularly good by comparison with growth of over 4.5 per cent in 2000.' Mitchell noted. However, it means that the industry will avoid a full-blown recession.Overall, the industry is now at the bottom of the cyclical trough - and although it's deeper in the US, Europe is also feeling the pinch. The CIA panel believes that the recovery will build in momentum to the point that quarter-on-quarter growth could reach 4 per cent in Europe by the end of the year. However, Mitchell warned, prices and units are likely to remain under pressure.

This should help lift the cloud of gloom over the chemical industry, if only a little. But the problems remain. As Len Berlik, vice-president of ICI's performance specialities division, pointed out, the industry is still not attracting investment from the financial markets. 'We know how to cut costs, we know how to restructure, we know how to do deals, but we appear to have forgotten how to grow,' he said.

ICI is attempting to reverse this trend by launching products which fit the guidelines laid down for sustainable development, in the hope that this will attract investors as well as boosting sales. For example, it is extracting squalane, an emollient used in moisturisers, from olive oil rather than its usual source, shark liver. Another innovation is packaging foam made from biodegradable corn starch rather than expanded polystyrene.