June quarter results mostly reflect a slow economic recovery in the U.S. and persistent recessionary conditions in Europe, leading to weakening demand for chemical products. High input costs and weaknesses across some key end-markets (such as construction and electronics) remain the major impediments to growth. Companies in the chemicals space witnessed slowing economic activity in the quarter, largely due to the fragile economic conditions in Europe. Outlook for the U.S. economy has also suffered, though more recent data points seem to indicate some improvement. Even the emerging markets have not been immune from global downturn. Activity in China and some other emerging economies slowed in the June quarter. The Chinese economy has been going through a rough patch as government stimulus actions have not been successful failed to staunch the slowdown, at least for now. The problems were compounded by a slowdown in exports. These issues are expected to continue to weigh on the performance of the chemical stocks in the second half of 2012. Industry Dynamics Chemicals are generally used to make a number of consumer goods and are also used in the agriculture, manufacturing, construction and service industries. In fact, the chemical industry itself consumes 26% of its own output. Major industrial consumers include rubber and plastic, textiles, apparel, petroleum refining, pulp and paper and primary metals. The chemical industry, a nearly $3 trillion global business, has grown at a brisk pace for more than five decades. The fastest growing areas have involved the manufacture of synthetic organic polymers used as plastics, fibers and elastomers. The chemical industry is mainly concentrated in three areas of the world: Western Europe, North America and Japan. Europe is the largest producer, followed by the U.S. and Japan. The U.S. chemical industry represents roughly 19% of the global chemical output and employs more than 800,000 people. It is responsible for 10% of the nation’s merchandise exports, aggregating $145 billion annually. Roughly 5.5 million additional jobs are backed by the purchasing activity of the chemical industry. The chemical industry, by nature, is cyclical and heavily linked to the overall condition of the U.S. economy. Chemical industry also touches 90% of manufactured goods, making the manufacturing industry the biggest consumer of chemical products. There are 170 major chemical companies in the U.S. operating internationally with more than 2,800 facilities abroad. The chemical industry is among the biggest industries in the U.S., a roughly $760 billion enterprise. It has been consistently leading the U.S. economy’s business cycle due to its early position in the supply chain. According to chemical giant BASF SE ( BASFY ), global chemical production (excluding pharmaceuticals) rose 4.8% in 2011, backed by healthy demand from major industries. In the EU, chemical production edged up 1.6% while declining 3.1% in Japan, hurt by the March 2011 quake. The sluggish economy took a toll on growth in the U.S. as the nation’s chemical production grew a nominal 2.1% in 2011. South America and Asia (excluding Japan) witnessed growth of 4.7% and 11.1%, respectively. Growth in Asia was led by strong contributions from China.

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