Demand to remain stagnant for H2 2024 and beyond as global chemical rationalization takes shape

European chemical market sources expect to see its lagging economy kickstarted by at least one interest rate reduction in the next couple of months, and hope to see that provide a boost for lagging chemical demand. The macroeconomic view of Europe contrasts with that of the US economy, which appears to be motoring along.

In Europe, inflation for April was stable at 2.4% and the eurozone's key interest rate remains at 4%, while in the US, inflation sat at 3.4% and the US Federal Reserve bank rate at 5.25-5.5%, the highest level in more than a decade, according to EU and US government data.

Unlike in Europe, the US Fed was expected to hold interest rates or even raise them to cool the economy.

European petrochemical traders referred to the current economic misalignment between Europe and the US and the prospects for monetary policy going forward.

"The European economy is not growing," a European trader said April 17, adding that "unemployment in Europe is at 6.5%, Greece's and Spain's [unemployment] is around 11%. The economy is in the doldrums; Europe will have to drop interest rates to put some steam into the economy."

The impact of US/European monetary policy and the Eurodollar exchange rate has ramifications for European chemicals beyond a simple boost to demand. In terms of European feedstock costs, European naphtha and LPG prices are quoted in dollars, while the monomers sold to resin producers are traded in euros. This means that European production costs would rise given the lower purchasing power of the euro and lead to lower margins.

Looking at the euro-dollar exchange rate, even any potential decrease in European feedstock costs could be wiped out by any fall in the value of the euro versus the dollar, negating a drop in the dollar denominated naphtha cost against the euro-traded ethylene contract.

In this scenario it would make the buying of cracker feedstocks more expensive. It's not an easy trade-off for European market participants to make.

"Europe must lower interest rates. The problem with that is the euro would depreciate further and that wouldn’t be useful for Europe as it has to buy energy in dollars," a trader said.

In addition, with geopolitical issues still a cause for concern, this was all feeding into the oil price volatility,

"We have this sort of atmosphere, the scenario of economic disparity with the US. Then we have all these wars and geopolitics going on. The Middle East and the oil production sector is becoming a war zone."

"If they (energy costs) go down they are not going to be able to bring the (ethylene monomers) down due to the devaluated level of the euro."

Global chemical demand a real challenge amid growing geopolitical tensions

Consumer confidence remains below the long-term EU average since early 2022, with the latest flash-reading in April 2024 at -15.2% for the EU and -14.7% for the eurozone area compared to the long-term average, according to data from the European Commission.

Polymer manufacturing and its downstream industries are consumer-led. This means that the combination of a slurry of high inflation, weak economics, high interest rates and low wage growth have fed into lower personal expenditure, according to Michael McDermott, Director of Polymers, S&P Global.

While non-durable fast-moving consumer goods, including packaging, have remained robust, the demand into non-essentials, big ticket items such as home appliances and into construction applications has weakened considerably.

McDermott points to lethargic consumer demand through 2024, although it appears that it is nearing a low point.

"Inflation is on its way down and demand may pick up in the third quarter. However, the underlying fundamentals are weak for domestic (European) industry. The high-cost position for manufacturers in Europe and weak domestic demand has led to major polymer producers and downstream converters either closing assets or relocating facilities to more competitive markets overseas.

"Overall 2024 is expected to be flat, potentially with a small improvement in Q3, with the likely start of recovery anticipated for Q2 2025 (following seasonal trends)."

Given the challenges that high inflation has had on demand over the past two years, the global petrochemical supply side is expected to look different in the coming months and years as Europe transitions away from uncompetitive and inefficient petrochemical production, even though protectionism will also remain a tool in governments' armories.

The European Commission is due to announce the results of a probe into US and Egyptian polyvinyl chloride imports, which began Nov. 15, 2023 after producers lodged a complaint about cheap PVC imports from Egypt and the US.

This is the latest in a series of antidumping probes launched by the EC since 2020 on US, Egyptian and Chinese chemical imports.

Overall, despite a gradual, expected improvement in the economic environment for H2, fundamentals remain weak within Europe's domestic market. Competitive costs position in the US and Asia will continue to challenge European producers amid elevated energy prices and currency pressures from a contrasting US economy and monetary policy. Global chemical demand is also expected to remain flat for the rest of the year as policy decisions will take time to feed through to consumer expenditure.

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Chemical Trends H2 2024
This feature is part of our bi-annual report analyzing the biggest themes and trends that will dominate chemicals markets in the year ahead. Explore more features below, or to read articles looking at the year ahead for a wider range of chemical markets, visit Platts Connect(opens in a new tab)

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