Date September 2018
Approximate net recovery on cost
- U.S. tariffs implemented in August and September 2018 on over $200 billion worth of Chinese imports, include $29 billion of chemicals and plastics products
- A recovery in demand in the energy industry, which is a key chemical end-market, has been a positive for the industry
- Industry revenue is projected to trend slightly downward over the next five years at an annual rate of –0.1%
Positive performance: The chemical industry has performed positively in the world economy driven by continued strength across major end-use markets including construction, automotive, and electronics. Another positive for the industry has been a recovery in demand in the energy industry, which is a key chemical end-market. The recovery is primarily the result of the rebound in crude oil prices from historical lows in 2016. West Texas Intermediate (WTI) crude prices were up 48 percent over last year as of the end of August 2018, and prices are expected to continue to increase at an annualized rate of 5.9 percent over the next five years. While diversified chemical stocks returns were down 1.8 percent year-to-date through the end of August 2018, returns were trending up 11.3 percent year-over-year for the same period, indicating a positive longer-term outlook.
Tariffs imposed: U.S. 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 to be implemented on September 24, 2018, relates to $200 billion in Chinese goods, including $25 billion in chemicals and plastics products. Duties will be initially set at 10 percent but will increase to 25 percent at the beginning of 2019. The American Chemical Council (ACC) recently estimated that approximately $9 billion in U.S. chemicals and plastics exports to China would be impacted by tariffs if China retaliates on the latest U.S. levies. That being said, there will be winners and losers as a result of the new tariffs; several U.S. chemical makers are pleased with the proposed tariffs. Chemical & Engineering News reported that Galata Chemicals, formerly part of the chemical maker Chemtura, contended in its submission to the United States Trade Representative that its organotin stabilizer business has been hurt by unfair Chinese industrial policies.
Despite ongoing bilateral discussions attempting to stem a trade-war, it remains to be seen what materials will be targeted next. The ACC has warned that impacts from tariffs on over 1,600 Chinese chemicals and plastics would increase prices for U.S. chemical firms and the end users of their products. 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 off-shored over the last few decades. To the extent that the increased cost of goods related to any products impacted by tariffs could not be passed along to the customer, this would put pressure on manufacturers’ and/or distributors’ gross margins, which could negatively affect appraised values.
Canada moves to shift manufacturing: Ongoing trade negotiations in the United States could pose a threat to its chemical export opportunities. In reaction to the current situation, officials in Canada are attempting to shift chemical plant investments away from the U.S. Gulf Coast. As reported by the Houston Chronicle, incentives offered in June 2018 by the provincial government of Alberta were designed to make natural gas feedstock development more cost-competitive. The availability of abundant, low-cost shale gas in the Gulf Coast region has made it a center for petrochemical development for years. A total of 325 shale-gas-related U.S.-based chemical projects worth in excess of $190 billion in capital investment were announced between 2010 and early 2018, according to the American Chemistry Council (ACC). However, the industry group also warned that trade actions proposed by the U.S. administration could threaten future growth. The ACC has requested that chemicals and plastics be removed from U.S. tariff lists, noting that a trade war targeting those products could negate the competitive advantage that inexpensive shale gas has given U.S. chemical producers.
It remains to be seen how ongoing U.S. trade and tariff activity may impact the global chemical industry on a long-term basis. However, industrial chemical manufacturers could benefit from competition between Alberta and Gulf Coast states for chemical investments if governments in those areas increase incentives for economic development.
Industry changes impact value: The chemical industry can be segregated into three separate categories: base chemicals, specialty chemicals, and consumer chemicals, which represent approximately 60, 25, and 15 percent respectively, of the annual domestic chemical production. Base chemicals are broken down into one of three sub-categories: petrochemicals, polymers, and basic inorganics. Specialty chemicals are typically developed for single-use applications such as dyes and pigments used in textile manufacturing, crop protection, and other industrial uses. Consumer chemicals are products that are typically sold directly to consumers such as cosmetics and personal care items, soaps, detergents and other cleaning products, perfumes, and flavorings. The chemical industry predicts an additional output from more than $163 billion in announced U.S. investment projects will generate $104 billion in new shipments by 2023.
Shale gas wells use hydraulic fracturing technology to capture natural gas from shale deposits. Shale gas is then separated at the well into methane and ethane, both of which are sold to industrial users. The abundance of this low-cost shale gas has led to increased demand for ethane as prices hit historical lows in 2015. Although natural gas prices have been rising (which will impact ethane prices), historically, and on a worldwide basis, natural gases in the United States remain very low.
The Petrochemical Manufacturing industry uses feedstock from natural gas or oil to produce petrochemicals, so purchasing these inputs represents the largest cost for industry operators. Due to the advancement of fracking and horizontal drilling technology taking place in the United States, there has been an increase in the U.S. production of oil and natural gas leading to companies re-shoring the manufacturing of petrochemicals and expanding their domestic operations. Ethane is also a significant key feedstock used in the manufacturing of ethylene, which in turn is used to manufacture a variety of petrochemical products such as polyethylene resin, one of the more widely used petrochemicals. Advancements in technology have created a copious amount of inexpensive feedstock for the industry, decreasing the prices of ethane. According to the Boston Consulting Group, the price of natural gas in the United States is about 2.6 to 3.8 times lower than competing countries.
Timely appraisals to understand procurement, manufacturing, and storage related costs in this rapidly changing industry are critical to maintaining accurate values, while offsetting potential risks associated with ongoing volatility in commodity markets.