Europe’s chemicals market highlights move into recession, and risk of future deflation

Chemicals are the best leading indicator for the economy:

  • Last month saw confirmation that the Eurozone has been in recession since Q4 last year
  • And last week confirmed that Chinese GDP growth had slowed to just 0.8% in Q2
  • Plus US Leading Indicators fell again – to a level that has always signalled recession since 1960

The reason for the chemical industry’s successful record is that it is one of the largest industries in the world. And its products go into almost every part of the economy, in every country. Plus it is relatively early in the value chain, so it “sees” things happening before they reach Wall Street or Main Street.

Thanks to former American Chemistry Council chief economist, Kevin Swift, now with I.C.I.S, it is also possible to see an overview of developments by checking on overall Operating Rates OR%. As the chart shows:

  • Global OR% are hovering around the 65% level, versus their normal 78%
  • European OR% have fallen even further, and dipped again to a disastrous 55%

Q2 is normally the strongest period of the year. Winter has passed, factories are normally running flat out, and construction is strong with the return of good weather. But not this year.

Ethylene is the major product in the petrochemicals area. It goes into a wide variety of products including polyethylene, detergents, PET bottles, polycarbonate, polystyrene and PVC. It is almost a perfect proxy for what is happening.

And as the chart shows, the news is not good. Q1 output was the lowest since since 1996 at 4.4 million tonnes. Volume was even lower than in Q1 2009, after the start of the Great Financial Crisis.

Data for Europe’s chlorine business tells a similar story, as the chart shows.

Chlorine is produced from salt, along with caustic soda. And it was invented around 250 years ago – so it is an excellent indicator for the global economy.

Most pharmaceuticals contain it, and it is vital for disinfecting drinking water, as well as having a host of other applications.

Its demand has crashed since Russia’s invasion. And it seems its normal rebound at New Year has already begun to fade.

In other words, these two core products are trying to tell us something very important about the state of the European economy. And the news is clearly not good.

In turn, prices are also being impacted as the chart shows:

  • Contract prices, normally more stable, have fallen from €1500/t to €1200/t over the past year
  • Spot pipeline and delivered prices have fallen even further, almost halving from €1100/t to €600/t

I.C.I.S expert, Jane Massingham, highlights how a “chasm” has opened up between contract and spot prices. Demand is so low, buyers are struggling to take even their contract volumes: 

“The gap between spot and contract is amazing. For people who are buying on contract basis, it is really a nightmare.”

Looking ahead, it is hard to see any light on the horizon:

  • President Putin’s decision to veto the Ukraine grain deal highlights the potential for him to continue reaching for ever more extreme measures
  • Similarly, OPEC+ seems determined to try and push oil prices higher. And hedge funds are keen to push natural gas prices higher.

The chemical industry is therefore now starting to warn us of a new risk. Europe is already suffering from a cost of living crisis. And people simply can’t afford to pay even higher prices for energy. At a certain point, therefore, demand may simply collapse, and usher in deflation.