Inflation dampens consumer demand
From 2021, most economies around the world are facing inflation. During this period, chemical producers have been passing on costs downstream, sharply raising prices to keep up with rising energy, raw material and labor costs. With the cost of living soaring and consumers becoming more cautious, chemical producers are again starting to feel the impact of higher downstream retail prices on demand. At present, chemical manufacturers are facing pressure from both sides, and the market outlook is not optimistic.
In recent days, affected by inflation, the performance of the US retail industry has been unexpectedly weak, and even affected the US stock market. Retail giant Walmart has adjusted its full-year sales forecast, with Walmart CEO Carl Douglas McMillan saying on a first-quarter earnings call that the company’s profit margins are eroding. The reason is that consumers are more inclined to buy food rather than more expensive items, spending less on electronics and other durable goods due to higher food prices.
Walmart’s woes are a microcosm of the current global macroeconomic environment, which is having a negative impact on commodities such as chemicals. As IMF Managing Director Kristalina Georgieva underlined recently at a World Economic Forum panel, a slight reduction in raw material price pressures could reduce costs for chemical producers, but as food Prices continue to rise, and consumer spending is unlikely to support chemical producers downstream. Georgieva said: “Many countries have experienced a commodity price shock, and one particular shock I want to bring to your attention is food prices. Because people feel that the economy may be in a more difficult situation. Oil prices have fallen. But food prices continue to rise. That’s because when economic growth slows, we can use less gasoline, but we have to eat every day.”
In Europe, energy is also a focus. Energy prices have continued to rise as Europe tries to wean itself off Russia’s oil and gas imports within a very short period of time. Even the UK, which is less directly reliant on Russian gas, is considering raising the cap on annual energy bills per household to £2,800 in October, having just raised the annual energy bill per household in April this year. The cap was raised by 50% to £1,970. Jonathan Brillley, head of Britain’s energy regulator Ofgem, described the current situation as a “rare event in a generation” and warned that rising energy prices could push 12 million people into “fuel poverty”. In this case, people are bound to spend less on electronics, cars and home decor.
Even if the energy crisis is resolved tomorrow, the long tail of rising costs across the value chain from upstream to downstream means that price increases are likely to persist for most of the year. In the second half of the year, chemical executives will focus on a possible scenario in which end-user demand falls but production costs remain high.
Market participants predict that from the perspective of the chemical industry, the outlook may be even more bleak. At present, the main driving force of economic growth in Europe and the United States comes from the service industry. Recently, Eurozone PMI data showed that growth in the manufacturing sector was near stagnation, while the services sector performed more strongly. This is in contrast to the COVID-19 pandemic, when consumers who couldn’t travel or socialize poured money into new durable goods and home improvements. Now, facing the highest levels of energy and inflation since the 1970s, consumers are prioritizing their disposable cash for restaurants, concerts and vacations. Commenting on recent French business climate data, Dutch market participants pointed out that current indicators point to a double-speed growth in the French economy, with the fastest growing service sector. In the weak industrial sector, the outlook is deteriorating, with lower foreign orders, weak demand due to high prices, and supply difficulties.
However, market participants also predict that regardless of the direction of the current economic storm, demand in the food and medical industries will remain strong. In addition, shortages that have plagued certain industries over the past few years may make demand for certain consumer goods stronger than they would otherwise be. It would also bring some resilience to the chemical industry.
A shortage of semiconductor chips over the past two years has created pent-up demand for automobiles and consumer electronics, which is likely to continue to be released despite the current poor market environment, according to market participants in Germany. Manufacturers’ optimism about exports has improved slightly, although few expect any improvement in the near term, according to the latest survey by the German Institute for Economic Research, a think-tank. This could suggest that market participants will once again adjust to the latest turmoil in the global economy, as they did during the 2020 COVID-19 pandemic.