OUTLOOK '11: US chems to grow on recovery, exports

03 January 2011 16:23  [Source: ICIS news]

US chemical demand to rise in 2011By Al Greenwood

HOUSTON (ICIS)--Demand for US-made chemicals will likely increase in 2011 as the nation's economy continues to recover and maintains a trade surplus for the second year in a row.

As it is, the US chemical industry will likely report a trade surplus of $3.7bn (€2.8bn) in 2010, its best performance in 10 years, according to the American Chemistry Council (ACC).

US exports would grow by 9.7% in 2011, outpacing the expected 7.8% growth in imports, the ACC said.

"Bottom line: exports have been a real bright spot for the US chemical industry," said Tim Hanley, US process and industrial products practice leader for consulting firm Deloitte.

Several factors were behind the growth in US exports, said Kevin Swift, chief economist for the ACC.

Demand continues to increase from emerging markets, according to the ACC.

The increase reflects the fast-growing economies in those countries, a rate that is much greater than the developed world.

That faster gross domestic product (GDP) growth could strengthen those nations' currencies versus the US dollar, giving US chemical producers another advantage, said Hanley of Deloitte.

However, another factor is weakening the dollar, Hanley said. The US has a significant deficit, and the weakening currency reflects concerns about that deficit.

In addition to a weaker dollar, the US will have another price advantage.

The country should continue developing its shale-gas reserves, lowering production costs for many chemicals.

In the US, more than 70% of its ethylene is produced from natural gas liquids, a co-product of natural gas production, according to the ACC.

In contrast, western Europe relies on naphtha and other oil-based products to produce more than 70% of its ethylene, the ACC said.

Ethylene is a key feedstock for many downstream chemicals. As a result, US chemicals should maintain a cost advantage.

That advantage had already appeared in 2010.

As a rough and general rule, US petrochemicals become more competitive when the price ratio of crude oil versus gas exceeds 7.

That ratio has exceeded 22 to 1, a factor in a 15% increase in US exports of thermoplastics, the ACC said.

Shale gas could also lower costs for chemicals not directly connected to ethylene.

For example, Georgia Gulf buys natural gas to produce steam and electricity for its chlor-alkali production, according to Dahlman Rose, a US investment firm.

As a result, cheaper natural gas could lower the company's production costs for chlorine and caustic soda.

Meanwhile, domestic demand should increase as the US economy continues to recover. The ACC estimates that the US GDP will grow by 2.4% in 2011.

Although Hanley was cautious in his outlook, companies could still resume capital expenditures next year - since so many of them had deferred investments during the recession, he said.

Some companies may re-examine high-return investments, which they had shelved during the downturn, he said.

Also, US automobile sales should continue rising, reaching 12.7m units in 2011, the ACC said.

Hanley said the increase would reflect pent-up demand. Plus, consumers are a bit more confident.

However, 2011 automobile sales will remain below their peak in 2006, when they reached 16.5m, according to the ACC.

The ACC's outlook for housing is even more pessimistic

Housing starts would reach 780,000 in 2011, the group said.

While that is up from 2009's 560,000 and 2010's projected 600,000, those figures are still far below the 2005 peak of 2.07m, according to the US Census Bureau.

In fact, if the ACC's forecast holds out, 2009-2011 would be the three worst years since the 1959 start of the Census data.

"Housing is going to continue to be somewhat of a drag," Hanley said.

Moreover, the outlook for non-residential construction remains poor, since that market typically lags behind the housing industry, Hanley said. Developers are still worried about excess capacity in the market.

While the US economy should continue growing in 2011, its recovery will remain fragile, the ACC said.

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy
To discuss issues facing the chemical industry go to ICIS connect

By: Al Greenwood
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