Engineering News

Demand key for European chems ahead of euro, oil
Mon Jun 20, 2005 07:03 AM ET

FRANKFURT, June 20 (Reuters) - Strong demand for chemicals as the global economy grows, coupled with a weaker euro, is expected to keep the European sector's sales and profits buoyant, even while crude oil prices stay high.

The European commodity chemicals sector, which makes large volume chemicals such as chlorine, caustic soda and plastics, has been enjoying an upswing since the end of 2003, which most analysts in a Reuters poll last month saw ending only in 2006.

But the fortunes of chemical companies in the region are influenced by two major factors: the euro and oil prices.

Prices for New York crude oil futures for July soared to a record high on Monday of $59.23 a barrel (CLc1: Quote , Profile , Research ) before easing back slightly. London Brent (LCOQ5: Quote , Profile , Research ) was at $58.25.

On foreign exchange markets, the euro reacted sharply to the failure of European Union leaders to agree on a long-term budget, which added to the existing crisis over the proposed EU constitution, rejected by the French and Dutch.

The euro was at $1.2218/19 around midday after hitting a low of $1.2182 according to Reuters data. A weaker euro makes European exports more competitive.

"The euro is the slightly bigger effect. The oil price has been going up for the past 18 months, and profitability at chemical companies has been rising," said a London-based analyst.

"But ultimately oil and the euro are peripheral issues: what matters most is what's happening to demand."

"We've seen oil at $40, $45 and $55, and we thought we would have to deal with falling product demand, but it hasn't really happened."

CHICKEN AND EGG

Analysts say that there are two ways to look at a high oil price from the chemical industry's standpoint.

Higher oil prices raise the cost of raw materials for chemical firms, which is a clear negative. But they also indicate robust economic growth, which fuels demand for chemicals that go into everything from car dashboards to the fizz in sparkling water.

"The issue of the oil price depends on whether it's saying something about global economic demand or just about the oil industry's supply characteristics," said Commerzbank analyst Peter Mackey.

The European chemicals sector is driven by strong export growth, which compensates for sluggish domestic markets.

In the first quarter, chemical exports out of Germany rose 9.2 percent to 20.5 billion euros.

"The euro at $1.22 versus $1.30 earlier is incrementally better, but it is still a high rate," said Mackey.

At the end of April German chemical giant BASF, a bellwether for the European chemicals industry that makes everything from pesticides to plastic, raised its estimate for average oil prices this year to $45 a barrel from $35.

But this did not stop BASF, the world's biggest chemical company by sales which also produces oil and gas, from forecasting a possible rise in 2005 earnings over an already strong previous year.

The London-based analyst cited earlier said that a weaker euro was clearly good in isolation but even that could turn into a worry if it were linked to weaker demand in the eurozone.

Source: Reuters

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