Commodities | Aug 06 2009
By Chris Shaw
According to the Energy Information Administration US industrial demand remained weak in May and there was no improvement in industrial production indices for June, but in the view of Barclays Capital there are signs emerging that a recovery in these measures is not too far away.
This has implications for the natural gas market in the group’s view as it notes industrial natural gas demand, which accounted for 28.5% of total consumption in the US in 2008, is closely linked to the state of the overall economy as evidenced by the trend holding during the plunge in consumption at the end of last year and the weaker demand so far in 2009.
Looking ahead, Barclays sees US industrial production as set to bounce higher in the September quarter of this year as inventories in the Automobile sector are lean at a time when demand is forecast to increase given the “Cash for Clunkers” program. This should spur increased production. There should also be a flow on effect elsewhere in the economy, as other commodities such as steel and metal receive a demand boost.
Also supportive to the industrial production outlook is the group’s forecast for US GDP to grow by around 2.9% in 2010, as while this would be a mild recovery relative to the extent of the downturn, it suggests a jump in industrial production in the second half of this year before a moderation in the rate of increase next year.
Factoring this into its outlook for natural gas, Barclays notes six industries account for around 80% of industrial natural gas demand, with the chemicals, petroleum and coal products, food and primary metals the most significant of the six. The group’s assumption of a rebound in the automotive sector should produce an outcome of higher consumption for a number of products in these sectors, so lifting overall demand for natural gas.
But looking at the major industries specifically, the group is not as optimistic as for the chemicals sector it notes ethylene production remains quite weak with only a minor pick-up in 2010 expected, while overall chemicals output is not forecast to rise by as much as the recovery in industrial production next year given the subdued outlook for the broader economy.
A similar lag is also expected in the petroleum and coal products and primary metals sectors as petroleum refinery throughput is weak and is not expected to recover strongly over the next year. This while weak demand means US metal facilities have little incentive to significantly lift production at present. Growth in the food sector is expected to remain relatively stable given the sector has been least hit by the economic downturn.
This means the prospects for recovery in natural demand growth in the major gas consuming sectors of the US economy are more muted than the group’s overall industrial production forecasts, so it expects consumption of natural gas by the industrial sector to rise by only 1.9% in 2010 from its forecast for average consumption this year of 16.6 billion cubic feet per day.