Germany Petrochemicals Report Q2 2016 - New Market Report

Germany's petrochemicals industry is seeing a modest but strengthening market recovery amid a cyclical economic upturn. Much of the growth has been generated by low oil prices and the positive effects of the slide in the value of the euro against the US dollar. However, if the sector is to remain competitive, it will need to invest in research and development in high-value products.

The market trend suggests that a weaker euro, coupled with slower growth in the eurozone, is having an impact on the structure of the external market. In Germany, the value of chemicals sales declined by 1.5% to EUR74.6bn due to a 2.5% fall in producer prices, in spite of a slight increase in production volume. While sales in Western Europe (EU15) fell by 1.5%, the depreciation of the euro against the US dollar boosted exports to North American Free Trade Agreement (NAFTA) countries by 13%.

As a result of falling competitiveness, small-scale polymers capacity is being shut down as German petrochemicals producers seek to cut costs and improve competitiveness. However, some value-added polymers output is gaining strength. Ineos Group and Solvay SA's joint venture Inovyn has announced that it is permanently closing its 150,000 tonnes per annum (tpa) polyvinyl chloride production facility in Schkopau. Production at Inovyn was suspended in 2015 as Dow Chemical did not renew a vinyl chloride monomer supply contract. Meanwhile, investment is being directed into polymers used in the automotive industry, with BASF leading the way under its EUR6bn programme between 2016-2020.

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There is growing confidence of a strong year among plastic packaging manufacturers as consumer demand strengthens, while the construction sector is also set for rising growth rates. The weak point is the automotive industry, which looks set to be hit by the Volkswagen emissions scandal. This will put downward pressure on demand from the automotive parts producers and undermines the drive to diversify and add value to petrochemical production.

A cyclical upturn in the German economy as well as the wider eurozone should support stronger growth in 2016 with the expectation of 1.0-1.5% growth in both output and sales. German producers will also be able to maintain competitiveness in basic chemicals due to low oil prices.

Germany scores 81.8 points in the Petrochemicals Risk/Reward Index, up 0.3 points since the previous quarter as a result of improved country risk. Poor growth over the last few years has limited the market size and, while positive, we forecast muted growth. Germany retains its unassailable lead in BMI's European Petrochemicals Risk/Reward Index, a clear 8.3 points ahead of the Netherlands.

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