Cost of Living Depresses Consumer Demand, Chemical Market Outlook is not Optimistic

According to ICIS, a market information service provider for the global energy and chemical industry, since the end of last year, chemical producers have been passing on production costs to downstream companies, raising prices sharply to keep up with rising energy and raw material prices. The chief executives of several chemical companies have warned that rising costs will eventually hit consumers. With the cost of living soaring and consumers increasingly cautious, chemical producers are starting to feel the impact of higher prices on demand.

The recent massive sell-off that originated in U.S. equities and spilled over to Asian and European equities was sparked by unexpectedly weak earnings from major U.S. retail chains. For example, Walmart adjusted its full-year sales forecast, and Target said its first-quarter results were well below expectations. Walmart CEO MacMillan said on a first-quarter earnings call that the company's profit margins are eroding as consumers tend to buy groceries over more expensive items, spending on electronics and other durable goods also decreased.

Rising food costs dampen other consumer demand

The increasingly bleak global macroeconomic environment has slowed some commodity price gains slightly, but remains elevated compared to the middle of last year. Recently, U.S. West Texas Intermediate (WTI) and Brent crude prices have both exceeded $120/barrel. As International Monetary Fund (IMF) Managing Director Georgieva emphasized at a recent World Economic Forum panel meeting, a slight reduction in raw material price pressure may reduce costs for chemical producers, but is unlikely to be the case as food prices continue to rise. May support consumer spending.

Georgieva said, “Many of our countries have experienced commodity price shocks, and one particular shock is food prices. The economy may be in a tougher situation. When economic growth slows, we can use less gasoline, but we have to eat every day."

European energy prices continue to rise. For example, the United Kingdom considered raising the annual household energy bill cap to 2,800 pounds (about 23,400 yuan) in October. In April, the country just raised the household's annual energy bill cap by 50% to 1,970 pounds. Brillley, head of the UK's gas and electricity market regulator, described the current situation as a "rare event in a generation" and warned that "rising energy prices could cost 12 million people (nearly one-fifth of the UK's population). ) into fuel poverty”. In this case, people are bound to spend less on electronics, cars and home decor.

Even if the energy shortage disappears tomorrow, rising costs in the value chain from upstream to downstream mean that price increases are likely to continue for most of this 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.

Slow recovery in manufacturing, strong recovery in services

The outlook for the chemical industry is likely to be bleaker, as the main driver of economic growth comes from the services sector. The recent Eurozone Purchasing Managers' Index (PMI) showed that growth in the manufacturing sector was near stagnation, while the services sector was strong. That's a reversal from previous years, 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 business climate data in France, ING economist Montpellier pointed out that "the outlook for the industrial sector is not good, with fewer foreign orders and high prices leading to weak demand and supply difficulties".

Industry resilience is still to be expected

Regardless of the current economic environment, demand from the food and medical industries will remain strong.

In addition, the shortages that have plagued some industries over the past few years could lead to stronger demand for some consumer goods. For example, the shortage of semiconductor chips in the past two years has created pent-up consumer demand for automobiles and electronic products. Although the current market environment is not good, these needs may continue to be released.

This is confirmed by the optimistic view of the German auto industry on the export situation.

Market participants will once again adjust to the latest turmoil in the global economy and headwinds will fade soon.

What industrial producers have learned since 2020 is that the ability to accept and adapt to previously unimaginable market conditions is fundamental to survival. Under the epidemic, the company's ability to respond may be more competitive than forward planning.