United Kingdom Petrochemicals Report Q2 2012

The British chemicals industry will be unable to escape the uncertainties relating to the eurozone debtcrisis, with any drop in export activity at a time of domestic demand stagnation likely to lead to acontraction in output in 2012.

Industrial production growth, which is a fairly good indicator for growth in the chemicals sector, is onlymildly negative, with contracting economic output typically associated with much sharper declines inproduction. In addition, the latest purchasing managers’ indices (PMIs) suggest that the economy likelystalled rather than contracted during Q411, with the manufacturing PMI rising to 49.6 in December,suggesting that the pace of decline in output has eased. The construction PMI picked up to 53.2 inDecember from 52.3 the previous month. As such, the situation facing the British chemicals industry wasrelatively benign going into 2012.

Nevertheless, the British chemicals and petrochemicals economy faces a tough year in 2012, with theeurozone sovereign debt crisis risking a return to recession. We forecast growth below 1.0%, essentiallyflatlining, on the assumption that Europe’s policymakers prevent an outright meltdown of the euro. TheUK is heavily exposed via financial and trade channels and so a failure to stem the crisis would drive theeconomy back into recession, in our view. Given the high degree of financial and trade interdependencywith the eurozone, a failure to resolve the debt crisis would also likely lead to a contraction in Britishchemicals markets.

The UK scores 72.0 points in BMI’s latest Western Europe Regional Ratings, up 2.4 points since theprevious quarter leading to an increase in its position in the regional rank from fifth to fourth place. It isnow 0.4 points behind the Netherlands and 1.0 point ahead of Belgium. Although the score has improvedas a result of a rise in its country risk score, protracted economic stagnation, increased politicaluncertainty and further plant closures could see the country’s score diminish, potentially resulting in itsrank falling back.