PANAROMA Barometer sector risks in the world
The changes in our sector assessments reflect the development of the world economy since the end of 2014, marked by the appreciation of the dollar against other currencies, the oil price collapse and gradual recovery in the Eurozone. These trends have had repercussions on most of the sectors we track. So, although the US economy is still robust, we are downgrading our risk assessment for the North American energy sector to medium, because of weakening performance by companies linked to non-conventional oil resources. Conversely, we are upgrading our assessment on European chemicals, which are not only benefiting from falling production costs thanks to cheaper oil and the euro's depreciation against the dollar, but also because of the economic outlook which is improving quarter after quarter. Other sectors are also benefitting from these changes although we have not re-graded them. Costs in the maritime transport sector are also falling due to the lower oil price, but the economic slowdown underway in China is depressing demand. Finally, the automotive sector in Western Europe continues its recovery, symbolised by rising car registrations since April 2014 in Eurozone (+4.2% in February 2015 over one year), although this is not enough to warrant an upgrade
The fall in energy prices have a positive effect on the sector as a whole. In 2015 the FAO(1) Food Prices Index fell in February 2015 to its lowest level since July 2010 (-1.9% compared to January 2015, and -14% compared to February 2014). Harvests in the Northern hemisphere, particularly in the European Union and the United States, were especially favourable and foodstuffs are in good supply. This has led to a fall in the price of cereals, meat and sugar in February 2015. In contrast, the price of oil remained stable and that of dairy products rallied strongly.
Turnover for businesses in the agrofood sector in emerging Asia increased again in 2014 (+7% year on year). The sector still benefits from demographic dynamic and private enrichment. India announced the introduction of an export subsidy to boost its sugar exports, contributing at the same time to the fall in world prices. Moreover, there are quality issues with this maize production in China, the world's second largest producer, because of insufficient storage space. The fall in soybean prices is good for China, which is the world's largest soybean consumer and for which demand has been stimulated by the strong growth of aquaculture farms, which represents 62% of world capacity (88% for Asia as a whole, FAO)
If activity remained sluggish in 2014 (+1% year on year), growth prospects are favourable boosted by household consumption, in turn supported by a fall in unemployment and in the oil price. The United States are the first producer of maize in the world and its production should increase by +3.5% in 2015 (EIU). Demand is supported by ethanol production which represents about 35% of volume produced and 10% of the total US combustible fuel market. Although, the lower maize prices enabled industrial firms to increase their margins, the fall in oil prices should reduce interest for this biofuel. Furthermore, in December 2014, China reconsidered its position regarding American genetically modified maize, of which over one million tonnes were rejected in recent years, so exports can be expected to increase. Finally, forecasts for soybean production growth have remained at a record +18%, thanks, in particular,
to Chinese market consumption.
The agrofood sector is made up of a few large multinationals but mostly of small firms exposed to contracting margins associated with falling commodity prices. Indeed, the fall in food price (-0.3% in Eurozone in February 2015 over one year) related to the sluggish European demand has particularly affected small producers. Nonetheless, the corresponding drop in the oil price (about -50% between June 2014 and March 2015) helped reduce the cost burden on firms due to price moderation of fertilizers and freight cost. Moreover, the euro depreciation against the dollar benefits exporting companies (-20%
approximately since June 2014). In the European Union since 1984, milk quotas have led producers to limit their output to avoid penalties in the case of overrun. But, the market liberalization related to the removal of the milk quota system for the 1 st April 2015 should deeply affect the sector. A price decrease is therefore expected in Europe. Furthermore, while in France, fruit and vegetable prices fell respectively by 5.4% and 3.5% in 2014, less favourable weather conditions at the end of the year pushed up the prices of fresh vegetables by 9.1% in February 2015 (year on year)
One of the sectors gaining most from the fall in oil prices is the chemicals sector. This is because this commodity is both one of its inputs and also provides it with energy. The outlook is improving especially in Western Europe, although the sector remains weakened by the situation in construction where risk remains high. In emerging Asia, we do not see any improvement. Our survey into payment deadlines in China (2) shows that the financial situation of Chinese companies is difficult. In North America, the appreciation of the dollar against other currencies is making American products more expensive. The low oil price is giving European chemical companies a leg up, although US companies still have an undeniable advantage because of the abundance of nonconventional hydrocarbons and robust activity.
Our China payment survey published in March 2014 revealed that activity in the chemicals sector deteriorated in 2014. Accordingly, almost a third of companies surveyed in the sector had experienced average payment periods exceeding 90 days. This average was 23% in 2013 and 17% in 2012. The sector is still suffering from the poor state of the real estate and construction sector, one of its main clients. The fall in prices offers only 2 a little bit of good news undermining the value of inventories and eating into margins. But above all, coal occupies a key position in China's energy mix, making the supply from competitors more competitive
The relatively better health of the European manufacturers is affecting those of the North America.Moreover, the dollar's appreciation is making US exports more expensive and limiting their competitiveness. Nonetheless, the robustness of the automotive sector and a dynamic construction sector are helping sustain activity in the sector. Accordingly, the American Chemistry Council (ACC) activity barometer was up by +3% at 15 March 2015 compared with the same date in 2014.
The chemical industry has made quite a comeback: sluggish economic activity, high crude prices, competition from the Middle East and the United States. The European Chemical Industry council (CEFIC) activity indicator points to a rise of only +0.3% in 2014, compared with 2013. The sub-sectors ontributing most are the speciality chemicals segment and the consumer products segment. The price of crude, which has halved since summer 2014, has nonetheless enabled them to narrow the competitiveness gap with US firms and restore their margins (after the depreciation of inventory values). Finally, the euro's depreciation has breathed new life into European chemicals exports, reducing slightly further the competitive advantage of their main rivals.The situation in France has improved significantly, with a 1.9% rise in sales in 2014 according to UIC (Union des industries chimiques), whether due toexports or to the positive contribution of the
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