Spring will be a little late

Perhaps it's the current commercial hype promoting the Harry Potter and Lord of the Rings movies, or maybe it's the smiles of retailers basking in the warm glow of a credit-fuelled Christmas, but it is difficult to distinguish fantasy from reality as we enter the new year.

On the one hand, there appears to be a consumer-led 'spend, spend, spend' boom as people take advantage of interest rates at their lowest for a generation; while on the other, manufacturing industry is battening down the hatches for trouble ahead. Which is the fantasy?

The reality is that the storm clouds are gathering, particularly for the largest of the process industries, the chemicals sector. Akzo Nobel greeted the new year with news of even more job cuts on top of the 2000 announced last year, while a slump in the market for ethylene oxide derivatives has persuaded Dow Chemicals to mothball its plant on Teesside. And that's just this month's news.

The closing months of 2001 brought equally gloomy predictions from the likes of CEFIC in Europe and the American Chemical Council. The latter's prognosis was clearly affected by the aftermath of September 11, but such is the global nature of the chemicals industry that a falling US market will inevitably influence producers elsewhere.

EU chemical producers saw output grow by only 1.1 per cent last year, compared with 4.6 per cent in 2000. Excluding pharmaceuticals, however, the industry was actually in recession, shrinking by 1.1 per cent. The CEFIC forecast for this year is marginally more positive - output is expected to grow 0.8 per cent, or 1.8 per cent if pharmaceuticals are included.

Historically, the chemicals industry has been more cyclical than most and arguably more adept at handling its peaks and troughs. This time around though, other sectors find themselves in the same trough. Electronics and semiconductors, for example, have taken steep falls - followed closely by those speciality chemicals producers supplying the sector.

And compounding the recessionary trends in its wide-ranging customer base, the industry has managed its usual trick of overloading itself with ethylene capacity at the wrong end of the economic cycle. Four world-scale plants for this basic chemical are due on stream soon, following a year that, according to one analyst, saw 'the greatest amount ever in terms of absolute volume of ethylene coming on stream, in a year when ethylene demand has probably shrunk'.

In a perverse way, however, the re-emergence of ethylene overcapacity around the world is a harbinger of better times ahead. Older plants will be closed, supply will be trimmed to meet demand, and the cycle will move on upwards again. When? Well, if the industry could second-guess that, it wouldn't be building plant in a declining market in the first place.

But, partly because it is continuing to build plant, the best guess at the moment is that the chemicals cycle could bottom out by mid-year, with the first shoots of recovery coming by the end of the year - or, perhaps, by Spring 2003.