INSIGHT: Hope for 2023 European construction market recovery falters as spring demand uptick fails to materialise

LONDON (ICIS)–Since late 2022, chemicals players have been hopeful that better demand is just around the corner but optimism is faltering as economic conditions remain challenging and spring construction demand has failed to ignite.

“Quarter after quarter people were hoping the next quarter would be better. Now, the outlook for Q3 is depressed and it seems questionable if we can see recovery in Q4,” stated one oxo-alcohols buyer.

Mono propylene glycol (MPG), plasticizers, oxo-alcohols, epichlorohydrin (ECH) and polyols are some of the markets where sources are uncertain when consumption may return to pre-COVID levels.

The fourth quarter of 2022 was a period of harsh destocking and historically low demand in several chemicals markets as players down the value chain aimed to end the financial year with low working capital.

Sellers were hopeful consumption would pick up in the first and second quarter of 2023 but any improvements in demand have been marginal and in some markets, such as polyols, consumption has slowed.

Market participants are now uncertain if buying activity will improve at all in 2023 with one plasticizers producer commenting, “I’m a bit worried in general if we will continue to see softer demand through next year as well.”

High interest rates, inflationary pressures and low consumer confidence are the key factors subduing market participants hopes of demand recovery.

“It boils down to one thing: consumer confidence. It comes down to how much do you have to spend with the current inflation rates and with what is forecasted for the autumn. There will be no relief, at least this year, for households,” said one plasticizers producer.

SEASONAL DEMAND ABSENT
The construction sector is a key demand benchmark in many European chemicals markets including MPG, plasticizers, oxo-alcohols, ECH and epoxy resins.

Demand from construction-related applications, including architectural coatings, unsaturated polyester resins (UPR), flooring and roofing membranes, typically peaks over spring when temperatures are mild.

Sources previously expected the 2023 peak construction season would be slow to start and not as pronounced as in previous years.

However, oxo-alcohols, ECH and MPG sellers are yet to see any uptick in volume requirements from the construction sector and plasticizers sellers have actually seen a slowdown in construction demand.

“Construction picks up with the warmer weather so logically there should be an improvement in demand in Q2 but I don’t know if this will happen this year,” said one ECH producer.

High interest rates and inflationary pressures are the main factors dampening construction activity but difficulty securing permits and environmental regulations are also weighing on the sector.

“Demand for housing is there but there is a number of other factors. Investors are hesitant with high interest rates, there’s environmental protections, pressure to make low income rent [apartments]. All these factors makes a difficult climate,” said one oxo-alcohols buyer.

EU construction output is forecast to contract 0.8% this year, according to Oxford Economics.

For oxo-alcohols and plasticizers sellers, offtake from industrial and infrastructure construction projects, including new hospitals and schools, are holding up better than residential projects.

Many market participants no longer expect there to be any seasonal peak in construction demand in 2023 and some are even concerned activity in the construction sector will slump further.

“Flooring and roofing membranes is pretty bad for the time being. I don’t see it recovering soon, especially in Germany. Building activity is low and there’s no indicator showing it’s improving,” said one plasticizers seller.

“According to one European resins producer, March demand was 20% lower than typical for the period. One UPR resins manufacturer is operating at 70% capacity and another resins manufacturer is operating at 60-70%.

Construction is not the only sector where the usual spring uptick in demand has not materialised.

In the plasticizers market, do-it-yourself (DIY) sales did not spike as usual before Easter and in the MPG market, flavours demand has not picked up as typical in spring.

For one DIY company, Q1 sales were higher than forecasted but 30% below pre-pandemic levels.

For some players, the lack of seasonal demand has highlighted market conditions are even more challenging than previously realised.

SHIFTING CONSUMER PATTERNS
The COVID-19 pandemic and poor consumer confidence have altered historic patterns of consumer demand making it difficult for sellers in some markets to predict when order intake will pick up.

This is particularly challenging for players with a large exposure to the domestic appliances, DIY and comfort sectors.

“Lack of visibility is an overall challenge that the industry is facing. Old demand patterns were broken over COVID and people are trying to understand what new trends and patterns will emerge,” said one MPG producer.

Money was spent by consumers through COVID-19 lockdowns that will not be spent again for a while especially when inflationary pressures are strong and household budgets are shrinking.

In the polyether polyols market, sources are uncertain when to expect demand recovery as many purchases of large ticket comfort items, such as mattresses, were made during lockdown and such products have a long lifecycle.

“For spending, there needs to be much more evidence. In consumers’ crystal balls, they need solid proof and communications from central banks that things will improve,” said one plasticizers producer.

According to the European Central Bank‘s March projection, inflation should continue to fall during 2023, driven by declines in energy inflation. As cost pressures fade and the ECB’s monetary policy measures gradually take effect, inflation should come back to the 2% target in the second half of 2025.

LOOKING AHEAD
As demand remains tepid from many applications which typically have a seasonal peak in spring, market participants are resigning to the idea that market recovery may be further away than previously anticipated.

“It is a crisis, a huge crisis in my opinion. The situation will continue for the next year or one and a half years. When I looks as gas flows and the situation in investments and banks etcetera… this is not something that is pleasant at all…Some companies will not survive,” lamented one oxo-alcohols producer.

Some remain cautiously hopeful that consumption could pick up in the second half of 2023 but these sources accept there is no solid basis for this outlook.

“There is a lot of hope but not a lot of substance so far,” said one plasticizers producer.

Insight article by Nicole Simpson

Thumbnail picture source: Dominika Zarzycka/NurPhoto/Shutterstock