US manufacturing recession hits chemicals hard

01 June 2001 17:25  [Source: ICIS news]

US petrochemical and industrial chemical producers are having a hard time of it and data just released by the American Chemistry Council (ACC) confirm that fact.

Parts of US manufacturing industry are in recession and chemicals demand is badly hit. The steep run-up in energy costs has been a major headache for largely gas-based producers on the US Gulf Coast. The chemicals trade surplus – overseas trade has been one of the real sources of growth and opportunity– has turned down sharply and clearly will take time to recover.

ACC’s Policy, Economics & Risk Analysis (PERA) service has done some modelling work on gas prices and ethylene production. The results do not make comfortable reading from a North American perspective. Looking at the relative position of the main petrochemical producing regions in May 2001, and built on natural gas prices of $4.25/mBtu and crude oil at $28 a barrel, ethane-fed North America crackers were clearly disadvantaged. Ethane-fed US production costs at the time were at Northeast Asia - in other words, Japan and South Korea - levels and couldn’t match the production economics of either US naphtha-fed or West European naphtha-fed crackers. The turnaround in production economics has been dramatic. Only three years ago, Gulf Coast ethylene production costs were just behind the Middle East and Alberta, Canada, and well ahead of Western Europe. The run-up in gas prices has had a major impact on the business.

The main concern now is that a warmer than usual summer in the US will lift electricity demand and produce another spike in natural gas prices. If natural gas inventories don’t build up then a repeat of the situation in the 2000-01 heating season over the winter period is a possibility.

Flexible US crackers have switched to naphtha and heavier feeds – naphtha is now viewed as the feedstock of choice, ACC says. At some point this year more than 15% of Gulf Coast ethylene capacity has been idled. The situation has been similar in ammonia, methanol and MTBE (methyl tertiary butyl ether).

The impact on trade has been and will continue to be significant. Trade with East Asia, particularly, will be affected and there is no doubt that producers in the Middle East are taking the opportunity to gain market share. Add to this situation a slowing generally of global economic activity and prospects for US chemicals trade and the trade surplus this year do not look bright.

If current conditions continue, ACC’s PERA group says, petrochemical and derivatives exports could fall to $34bn (almost Euro40bn) this year – they were $35.9bn in 2000. The 2000 petrochemical and derivative trade surplus of $10.5bn could dwindle to $2bn. The impact on the overall chemicals trade balance would be significant. The $6.3bn trade surplus in 2000 was well down from the 1995 peak of $20.4bn. The PERA group is projecting a surplus of only $2.0bn this year and $4.0bn in 2002.

The run-up in energy and feedstock costs couldn’t have come at a worst time for producers. Declining demand in end-use industries have hit all sectors of the industry hard. The PERA group says that a ‘recession’ exists in great parts of US manufacturing industry, including intermediate sectors like steel, apparel, textile and forest products. Many technology sectors have been hit hard as well.

Looking at the wider perspective PERA says that housing and light vehicle markets have held up rather well and refinancing activity is improving consumer balance sheets. It remains confident that the Federal Reserve’s moves to cut interest rates will prevent the economy from entering a ‘protracted decline’ and is predicting a recovery in the second half of the year and a rebound by the fourth quarter.

The economic slowdown has the signs of classic inventory correction which has now largely played itself out, according to the ACC. The downside risks, however, are that concerns over job losses will have a negative impact on consumer spending and that capital spending slowdown will increase dragging the consumer sector with it. Other risks are financial problems overseas, a prolonged high value to the dollar, rising energy prices and another large drop in equity values.

Current forecasts are for GDP (gross domestic product) growth of only 1.8% in 2001 (growth was 5.0% in 2000) with weak growth in the first half and probably into the third quarter. An advance to 3.3% is expected in 2002. The figures reflect what most chemical companies are experiencing and predicting. Only last week, DuPont warned of weakness in major US markets, including apparel. It cannot yet see an end to the US slowdown.

By: Nigel Davis
+44 20 8652 3214

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