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Israel Petrochemicals Report Q4 2010
Business Monitor International, Sep 2010, Pages: 53
The Israel Petrochemicals Report provides industry professionals and strategists, corporate analysts, petrochemical associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Israel's petrochemicals industry.
A rise in interest rates at a time when Israel’s economic recovery is slacking could hamper hopes of a rebound in the Israeli petrochemicals market, according to BMI’s latest Israel Petrochemicals Report. The decision by the Bank of Israel to raise the lending rate by 25bps to 1.75% makes us increasingly cautious over the sustainability of the recovery, particularly given the fact that latest inflation data gives little reason to raise interest rates at this time.
The rise in interest rates contributes to significant downside risks with higher interests rates now holding back private consumption growth, which has already undergone a significant slowdown since Q209. Private consumption enjoyed a four-year high back in Q209 with 10.0% quarter-on-quarter (q-o-q) growth, and now has slowed to 1.6% in Q110, adding weight to our view that economic recovery is losing momentum and that rate rises now could prolong the process. According to the BoI, commercial banks' client loans are still growing at a slow rate with the latest data at 2.9% in May – significantly below pre-crisis levels of 23.8% in November 2008. Implementing higher interest rates at a time when spending is already weak will further reduce demand for large loans. As such, consumer spending is in peril and with it consumption of domestically manufactured plastics goods, despite expected 3.4% real GDP growth in 2010. This will also drag on growth in key petrochemicals consuming sectors, notably construction which BMI’s Infrastructure team forecasts will rise by 2.9% in 2010 following an estimated contraction of 4.8% in 2009. The slow pace of growth in construction will have a greater impact on PVC.
At the same time, monetary tightening will strengthen the value of the shekel against the US dollar and the euro, thereby undermining the competitiveness of Israeli manufacturers. A drop off in exports to the eurozone would have a significant impact on export figures, given that around 30% of Israel's exports are typically directed to the eurozone. Israeli exporters could, in theory, make up for a drop off in European demand by shifting their goods to other states. However, we are sceptical about this possibility.
We therefore remain sanguine about growth prospects for the near- and long-term in the petrochemicals industry, despite the less favourable international context. In our view, stimulatory fiscal spending will prop up private consumption growth in the short- to medium term, while falling unemployment, low and stable inflation, as well as historically low real interest rates should support it in the medium- to long term. The latter should also spur investment spending, as should the discovery of large hydrocarbon deposits in the Mediterranean that will attract investment into related infrastructure. Finally, although faltering growth in key developed export markets will continue to weigh on the relatively large external sector, increasing diversification towards faster-growing emerging markets as well as ongoing product specialisation should lessen the constraint.
In BMI’s Middle Eastern Petrochemicals Business Environment Ratings matrix, Israel is in seventh place, with a score of 52.9 points. With no planned significant growth in petrochemicals capacities over the medium term, Israel’s score is unlikely to change much over the next five years, although it could be improved by better political, economic and business risk ratings.
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