The economic sky turns cloudy

Experts forecast modest economic growth at best. The global economy is slowing, led by a pronounced weakness in the United States resulting from the housing downturn and the credit crunch. And this, of course, will significantly impact the chemical industry.

By Seán Ottewell, editor at large

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Cefic won’t comment at this point on how it might revise its forecasts given the continuing weakness in the U.S. 

Emerging markets

Developing countries, particularly China and India, clearly provide the bright spots in the outlook for the next several years.

The construction sector is driving growth in India. Just 10 years ago the market for construction chemicals was non-existent, notes Frost & Sullivan (F&S), Mumbai. It says the market is worth 10 billion rupees today and predicts it will rise to over 40 billion — or just over $1 billion — by 2013.

“Construction chemicals account for only 2% of overall construction costs but the benefits are in multiples; rising awareness, changing lifestyles and, most importantly, the increasing spending power of the end users will be the key drivers in the sustained expansion of the Indian construction chemicals market,” noted F&S’s Dominic Britto.

However, it’s China that’s really leading the charge. The country’s consumption of chemicals is booming. A small but typical example is the expected increase in demand for flame retardants. This should rise from 529,500 tons/year today to over 800,000 tons/year by 2012, according to F&S’s Dan Xu. “China has increasingly become the global production base for electronic products and a key region for consumption of plastics. The increase in demand for electric and electronic equipment as well as ongoing development of the building and construction and automotive industries spell good news for the growth of the Chinese flame-retardant chemicals market,” he said.

In November, such buoyant consumption, coupled with brisk exports, prompted the Asian Development Bank (ADB), Mandaluyong City, Philippines, to raise its economic growth forecast for China to 11.2% from 10% earlier in the year.

“The faster-than-expected growth momentum built up this year is expected to carry into 2008,” said Zhuang Jian, senior economist of ADB’s China Resident Mission. This is the highest growth rate since 1994 and is largely being driven by industries such as chemicals, oil processing, electricity and steel, he added.

A new set of statistics released in November by China’s Ministry of Commerce underscores the importance of the country to world trade. It revealed that in the first 10 months of 2007 the value of both Sino-U.S. and Sino-E.U. bilateral trade exceeded $200 billion. For the first time, the E.U. came out on top, with trade worth over $287 billion, versus $248 billion for the U.S. and $191 billion for Japan.

However, it’s important to remember that the U.S. receives one-fifth of all Chinese exports and that any downturn in the American economy will have serious repercussions there. In fact the People’s Bank of China estimated that every 1% drop in U.S. economic growth translates into a 6% fall in Chinese exports.

Hardly low interest

The sub-prime-loan debacle remains a continuing concern that clearly has ramifactions for the overall economy and, with it, chemical makers. While initially it was viewed as a short-term problem, today the doomsayers are gaining the upper hand.

For example, in November, Jerry Webman, the chief economic and senior investment officer with Oppenheimer Funds, Denver, Colo., commented that as each day passed more and more was learned about the size and scope of “unsavory loans” that remain on U.S. banks’ balance sheets. With consumer confidence plummeting, house prices falling and commodity prices rising, he pointed out that some commentators were already using the “r” word — recession. However, Webman did point to the third consecutive monthly decline in overall jobless figures as a “glimmer of hope in an otherwise dark backdrop.”

ACC’s Swift agreed that job growth is the only positive development at the moment. But he also warns: “If we get three months of job growth of less than 75,000 per month, we will be looking at recession. This jobs growth is holding up the U.S. economy. If it decelerates — well, exports are doing good, but they won’t make up for a softening of consumer sentiment...,” he concluded.

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