Chemical Industry Trends
COVID-19 Industry Brief
EFFECTS OF THE CORONAVIRUS ON THE Industrial Chemicals INDUSTRY Updated April 1, 2020
- Market Dynamics: Activity in the chemical industry is typically directly linked to industrial activity with pricing driven by a combination of finished product supply and demand as well as feedstock prices.
- COVID-19 Impacts: The U.S. chemical industry has been identified as essential critical infrastructure by the U.S. Department of Homeland Security and is considered an industry sector critical to public health, safety, and economic and national security and is thus allowed to operate as normal, while following CDC workforce and customer protection guidance. Additionally, precursor raw materials chemical transport by truck has also been allowed.
- Market Sentiment: The Chemical Activity Barometer, a leading economic indicator created by the American Chemistry Council, fell 8.0 percent in March 2020 following a 1.1 percent decline in February and a 1.2 percent gain in January. The decline in March was the largest in the post-World War II period. Worldwide production dropped by 2.4 percent in February following a 0.8 percent decline in January 2020, most of which was attributed to weakness in China due to COVID-19.
- Petro Chemicals: With petrochemical feedstock pricing declining due to oil prices, many related chemical prices such as ethylene, naphtha, benzene, and propane have also dropped significantly. European ethylene prices for example, the key feedstock for a significant amount of plastic products, have dropped from approximately €800 per metric ton (MT) in January 2020 to approximately €625 per MT by the end of March. With feedstock prices at these levels, and worldwide economic activity expected to decline, these prices are expected to drop further in the coming months.
- Other Chemicals: There has been some strength in a variety of chemicals, including hand sanitizers, alcohols, disinfectants, and multipurpose cleaners with retail demand in the United States increasing by a factor of 175 to 525 percent on a year-over-year basis in March 2020. Because of this skyrocketing demand, isopropyl alcohol, which is the primary ingredient in most hand sanitizers, pricing increased from $900 to $2,900 per MT.
- Valuation Outlook – Inventory: While it is clear that prices and demand for all types of chemicals are going to be volatile and subject to swings as the marketplace rebalances due to the combined impact of COVID-19 as well petroleum price volatility, Gordon Brothers believes that appraisal values for inventory on a mark-to-market basis should be relatively stable once the immediate COVID-19 marketplace impacts are resolved.
- Valuation Outlook – Machinery & Equipment: For equipment values, Gordon Brothers expects that the price advantage enjoyed by many of the new ethylene plants located in the Gulf of Mexico region will be gutted by this level of prices. While these plants will still be competitive in the North American market, their ability to export ethylene worldwide, which was part of the value proposition for building new capacity, is going to be materially impaired at current price levels. Equipment values in other sectors will likely soften as well as economic activity slows, but this will need to be considered on a segment-by-segment basis.
Date September 2019
- The chemicals industry is one of the industries hardest hit by the trade war between the United States and China
- A rebound in crude oil prices over the past two years has had a positive impact on the U.S. chemicals wholesaling industry, with revenue projected to grow 0.5% in 2019
- Demand for chemicals on the whole in Europe is also expected to increase at 0.5% for 2019
Approximate net recovery on cost
Tariffs escalate: The chemical industry is one of the United States’ largest manufacturing industries, serving a significant domestic market as well as an expanding global market. It is also one of the top exporting sectors of U.S. manufacturing. As such, the industry has been among the hardest hit by the ongoing U.S./China trade war, with both nations imposing billions of dollars of tariffs on one another’s chemical and input products over the past year. Recent talks between the world’s two biggest economies have raised hopes of a resolution of the trade dispute; however, the tariffs currently in place are already doing significant harm. China is one of the largest export markets for U.S. chemicals, leaving the American chemical industry heavily exposed its countermeasures. The trade tariffs have created an uncertain demand environment, hampering U.S. chemical exports to China. As China also navigates through an environmental regulatory crackdown, it has led to a tightening in the supply chain in many key raw materials for the United States. As a result, domestic chemical companies have been exposed to raw material cost inflation, with the disruption in the supply chain significantly increasing prices for certain raw materials.
U.S. section 301 tariffs went into effect in late August 2018 on approximately $16 billion worth of Chinese products, including over $4 billion of chemicals and plastics. In retaliation, the Chinese Ministry of Commerce announced a 25 percent tariff on $16 billion worth of U.S. goods, including fluoropolymers and other chemical products. Another round of U.S. tariffs implemented in September 2018 included $25 billion in chemicals and plastics products. And 2019 has not seen an abatement in tariff activity. In May of 2019, the United States upped the rate of an earlier tariff of 10 percent to 25 percent. The latest list of items on which tariffs have been levied by the U.S. (list four) targets $300 billion worth of Chinese goods subject to duties of up to 25 percent. A portion of list four went into effect on September 1, 2019, with the balance expected to follow on December 15, 2019. The American Chemistry Council (ACC), a trade group for U.S. chemical makers, notes that in combination with lists one through three, list four tariffs will impact all Chinese chemical and plastic imports. The ACC has also reported that the U.S. tariffs have affected $15.4 billion in Chinese-made chemicals and plastics, or approximately 53 percent of chemical imports from China. Further, retaliatory measures have affected $10.8 billion in U.S. exports of chemicals and plastics to China, representing about 85 percent of total exports.
The large domestic manufacturers of major base chemicals will in general terms be neutrally or slightly positively affected by tariffs as feed stocks for this production are generally produced domestically from petrochemicals, natural gas, and other materials that are not currently being impacted by tariffs. The types of companies that will be negatively impacted will be those distributing or consuming specialty and consumer chemicals, the production of which has been steadily pushed offshore over the last few decades. The extent to which cost increases due to tariffs could not be passed along to customers would put pressure on manufacturers’ and/or distributors’ gross margins, which could negatively affect appraised values.
Positive performance: The U.S. chemical wholesaling industry continues to be impacted by erratic input costs and legislation from the federal government. Since oil is the industry’s major input, falling oil prices from 2014 through 2016 created savings in the form of lower prices. Inversely, a rebound in crude oil prices since 2017 has contributed to a projected annualized increase in industry revenue of 1.3 percent for 2019.
A significant amount of the demand for chemicals used in manufacturing will come from a considerable increase in production capacity as new chemical facilities are being created. The ACC projects that U.S. chemical output, excluding pharmaceuticals, should increase by 3.6 percent by the end of 2019 as compared to an increase of 3.1 percent for 2018. The biggest input steering the U.S. demand for chemicals is consumer spending. Job growth, including in the chemical sector, has kept consumer confidence historically high. According to the Institute for Supply Management, industry manufacturers have committed to an increase of approximately 6 percent in capital expenditures by the end of 2019. Chemical firms that supply material for these manufacturers will benefit.
The chemical industry has performed positively in the world economy driven by continued strength across major end-use markets including construction, automotive, and electronics. The industry has also benefited from a recovery in demand in the energy industry, which is a key chemical end-market. However, the recovery is primarily the result of the rebound in crude oil prices from historical lows in 2016. West Texas Intermediate projects crude prices increased at an annualized rate of 5.9 percent for the five-year period ended 2019. The current weakness in this sector in 2019 may weigh negatively on the chemicals industry into 2020.
Sustainability agenda: Chemical companies are not newcomers to the concept of sustainability. Companies across the industry have been reporting and communicating on environmental footprints, impact mitigation, and sustainability for years. However because of an increase in consumer awareness of the environmental impacts of chemical manufacturing, chemical companies have begun instilling sustainability into their core strategies.
As of 2015, 95 percent of chemical company executives stated that their investors were paying close attention to sustainability performance, but only approximately 35 percent said their company had a proven value proposition for sustainability. More recently chemical companies have begun making sizable investments in technologies that bring renewable, low-carbon energy to consumers while reducing environmental and carbon footprints. For example, Nova Chemicals, a Canada-based polyethylene resin maker, brought on a Director of Sustainability in 2019. The main focus of the role is to develop new materials and redesign packaging to make products more recyclable. The company has also recently invested approximately $2 million to prevent debris from reaching the ocean. As focus continues to grow on the topic of greener technologies, companies that do not pursue a more sustainable manufacturing footprint could see an impact on revenue as customers seek less wasteful alternatives.
Manufacturing outlook: The chemical product manufacturing industry is extremely diverse, representing a significant part of the U.S. chemical sub-sector and generating approximately 5.0 percent of the sector’s revenue and 8.0 percent of its employment. From 2019 through 2024, product manufacturing revenue is forecasted to decrease 0.3 percent. This follows a decline of 0.4 percent for the prior five-year period ended 2019 based on information from research firm IBISWorld. One industry driving the possibility of gains is construction. With U.S. construction activity expected to pick up through 2024, demand for chemicals used in construction materials could follow. For example, the value of private nonresidential construction is projected to grow at an annualized rate of 2.2 percent through 2024. As a result, construction material manufacturers could stimulate demand for a wide range of chemical products, benefiting the industry.
Conversely, other key end markets for the chemicals industry, such as the automotive sector are forecasted to decline in revenue over the next five years. New car sales are projected to decline at an annualized rate of 0.5 percent, decreasing the demand for new car parts and reducing the demand for chemical outputs.