INSIGHT: US chemicals growth to cool quickly in 2011

16 September 2010 16:35  [Source: ICIS news]

By Joe Kamalick

US chemicals production growth set to ease in 2011WASHINGTON (ICIS)--US chemicals production is expected to show full-year growth rates of 8% to 9% this year on the strength of inventory rebuilding across US industry, but chemicals will cool considerably in the new year to an expansion rate in the range of 2% to 3.5%, according to leading manufacturing and process industry economists.

In its latest US Industrial Outlook, the Manufacturers Alliance said that it expects US basic chemicals output volume to grow by 8% this year and then fall to a much more modest 2% expansion rate in 2011.

A growth rate of 2% isn’t bad, especially with the overall US economy still struggling to pull clear of the recession, but the alliance forecasts much stronger growth in the new year for most other industrial sectors, including some that are downstream consumers of chemicals or their derivatives.

The alliance expects housing starts to shoot up by 40% next year, although that sharp advance is more a measure of how rock-bottom bad the residential construction industry has been since the federal home-buyer incentives expired.

Public works construction is seen to grow by 4% in 2011 from the -3% showing expected for 2010.

Motor vehicles and parts are forecast to grow by 12% next year.  That too represents a decline from what the alliance expects will be full-year 2010 growth of twice that. Still, a 12% expansion in autos production is a barn-burner compared with the 2% gain forecast for basic chemicals.

Engine, turbine and power transmission equipment production will jump to 25% growth in 2011, a sharp turnaround from the -5% decline in that sector that the alliance expects for this year.

The alliance’s outlook sees communication equipment ringing up a 12% growth rate next year after what is likely to be 8% this year.

Electrical equipment will enjoy an 8% expansion next year, building on a 6% gain this year, and medical equipment and supplies will jump from 2% this year to 6% in 2011.

So why are basic chemicals likely to cool so markedly in the new year?

Basically, the restocking is done and chemicals output will return to a growth rate that traditionally has tracked overall US gross domestic production (GDP) expansion.

Daniel Meckstroth, chief economist and director of economic research at Manufacturers Alliance, said that he expects US GDP for the full-year 2010 to be about 2.8%, and then ease further to 2.6% for 2011.

“Chemicals consumption will run closer to the growth rate of the general economy next year,” he said, noting that the 8% gain for basic chemicals forecast for 2010 would be due almost wholly to the sharp rebuild in inventories in the first half this year.

“The big piece this year was the inventory swing,” he said.

“There had been a big drawdown over the recession in basic chemicals and also in metals. The cash squeeze in 2009 put manufacturers under great pressure to reduce inventories,” he said.

“What we had in the first half of this year was manufacturers moving from reducing inventories to not reducing, and then going from not cutting to building inventory.”

As the alliance outlook report noted, “Basic chemicals volume recovered remarkably fast earlier this year but seems to have stalled in the past three months.”

“Production in the three months ending July is down 7% (at an annual rate) from the three months ending in April,” the report said.

“Now in September all the inventory swing is over, and manufacturers are not going to build inventories any more,” Meckstroth said, adding: “Chemicals consumption is going to follow more closely the growth of the economy - which is what chemicals usually do.”

Kevin Swift, chief economist at the American Chemistry Council (ACC), is a bit more sanguine about chemicals production growth both for this year and in 2011.

He forecasts full-year 2010 output growth for basic chemicals at 8.5% to 9% and an expansion rate next year of up to 3.5%.

Swift also sees a levelling off in inventories among downstream industries.

“Up until the first quarter this year, inventory rebuild shaped the recovery, and then in the second quarter it reached a plateau,” he said.

“Downstream chemical customers have been managing their inventory very well now, with purchasing closely matching what they’re using. Inventory building will not be a contributor to overall economic growth going forward,” he said.

For the last four decades or so of the last century, normal US economic annual growth was generally (barring recessions) in the 3% to 3.5% range.

But that is about to change, Swift said.

“Long-term economic growth is a function of capital formation, savings rates, the availability of capital, along with technical innovation - which is hard to measure,” he said.

“And the third growth driver is the availability of labor, the number of workers between the ages of 18 and 65 that are available,” he said, noting that “the growth rate for labor is slowing.”

The baby boomers - the name given to the US population explosion that came in the wake of World War II and ran from 1946 to 1964 - are now beginning to retire in large numbers, reducing both the size of the available work force and consumer demand.

(While the children of the boomers are well along in moving into the economy and the workforce, their population bubble, known as the boomer echo, is not nearly as profound an increase as was the sharp birth rate gains immediately after the war.  And US birth rates have been declining generally since the boomer years.)

As the boomers continue to age, Swift said, there will be lower economic growth.

“We now expect long-term growth rates in US GDP to be less than 3% on average,” he said.

In that context, a 2% to 3% growth in chemicals production in 2011 doesn’t look too shabby.

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By: Joe Kamalick
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