INSIGHT: US housing will squeeze chemicals more

17 May 2007 18:17 [Source: ICIS news]

By Joe Kamalick

Housing slump hammers chemicals WASHINGTON (ICIS news)--The ongoing slump in the US housing market is going to further squeeze margins for a broad array of chemical manufacturers, and the chill in home building could give the whole economy a nasty cold.

The US Department of Commerce reported this week that new home construction actually improved in April with housing starts up 2.5% to a seasonally adjusted and annualised rate of 1.53m units compared with 1.49m units in March.

In addition, April’s gain in housing starts marked the third straight monthly increase since the first of the year. January’s housing starts were at 1.4m and February inched up to 1.48m units.

However, those slim gains only look good in isolation. In contrast, the 2m housing starts seen in April 2005 and even the 1.8m home construction starts in April last year - when the housing downturn was already under way - show how weak the home building sector has become.

It is likely to get worse.

While housing starts have inched up since January, the Commerce Department also noted this week that building permits took a major hit in April. Building permits are filed with local governments by contractors when they are ready to start work and consequently are seen as a key bellwether for the housing industry.

April’s building permits were at a seasonally adjusted annual rate of 1.43m, down nearly 9% from March’s figure of 1.57m filings. That sharp decline in permits indicates that home builders are extremely reluctant to build new homes on speculation if buyers aren’t available.

David Seiders, chief economist at the National Association of Home Builders, said the crisis in the subprime mortgage market - loans made to high-risk borrowers at escalating interest rates - has infected the broader mortgage and housing sector.

“We’re now projecting that home sales and housing production will not begin improving until late this year,” Seiders said, “and we’re expecting the early stages of the subsequent recovery to be quite sluggish.”

This is bad news for chemicals manufacturers because the new home construction market is a key downstream consumer sector for the chemicals industry, driving demand for a wide variety of chemicals and chemicals-based products such as polyvinyl chloride (PVC) pipe, insulation, adhesives and synthetic fibres, among many others.

Domestic PVC demand has been slow since late last year, according to market sources, although US producers have been able to offset that decline with larger sales volumes into Latin America.

Ron Coifman, an editor at global chemical market intelligence service ICIS pricing, said: “The general housing market downtrend is expected to have a negative impact on demand for polyethylene [PE] in construction applications such as piping.”

“The soft housing market will dampen demand for polyester polyols and methyl di-p-phenylene isocyanates (MDI),” he noted, “used to manufacture rigid polyurethane products for roofing and wall panelling applications.”

So too is the housing downturn pressuring US producers of nylon, polycarbonate (PC) and acrylonitrile butadiene styrene (ABS), which have broad application in housing and commercial construction. Prices for these products have remained flat since the first of this year, market sources said.

The impact of housing’s fortunes on chemicals can be significant. According to Kevin Swift, chief economist at the American Chemistry Council (ACC), each new home constructed accounts for some $12,000 (€8,880) worth of chemicals, chemicals-related products or chemical processes.

With between 1.5m and 2m new homes built annually in the US, the housing sector represents downstream sales of approximately $18-24bn/year.

A serious slump in housing activity will affect chemical products highly visible in home building, such as the PVC used in plumbing pipe and plastic foam in insulation. There are less obvious effects as well.

Titanium dioxide (TiO2) also is feeling the squeeze from housing. US demand for TiO2 is down by 10% this year, according to ICIS pricing editor David Barry.

“A majority of TiO2 goes into paints used in home renovation and construction,” Barry noted, “and TiO2 also is used as a plastics colorant for vinyl siding, doors and other home finishing applications.”

“Producers’ domestic TiO2 inventories have risen well above normal levels,” Barry said, “and prices have deteriorated by 5% or more since the beginning of the year.”

The housing market could have broad impact even for chemicals producers and other manufacturers who are not upstream suppliers to home construction.

David Huether, chief economist at the National Association of Manufacturers (NAM), is particularly worried by job losses that he said can be traced to the housing slump and that indicate a wider economic decline.

He cited Labour Department figures showing that US unemployment edged up to 4.5% in April, including a loss of 19,000 jobs in the manufacturing sector.

However, it was April’s loss of 26,000 jobs in the nation’s retail sales sector that Huether found most troubling.

“You cannot overlook the drop in retail trade jobs,” he said. “This indicates that the ongoing downturn in housing is beginning to negatively affect consumer demand.”

Retail sales jobs are falling because consumers are shopping and buying less, reducing demand for sales staff.

“This is a clear signal that the strong pace of consumer spending posted in the first quarter will likely not continue into the second,” Huether said.

As consumer spending accounts for two-thirds of US economic activity, the nation’s economy is likely to see a further, broad-based decline in months ahead. That means less demand for clothing, automobiles, computers, recreational equipment, personal care products, and many other consumer items that drive upstream chemicals manufacturing.

By: Joe Kamalick
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