FocusUS chems contend with gloomy house market

20 September 2011 19:19  [Source: ICIS news]

By Al Greenwood

HOUSTON (ICIS)--Tuesday's statistics on US housing starts show that the industry is still struggling to recover after peaking five years ago, a trend that will continue to affect chemicals that rely on this key end market.

Housing starts in the US fell to a seasonally adjusted annual rate of 571,000 units in August, down by 5% from the revised July estimate of 601,000, according to the US Department of Commerce.

August's figure was by far among the worst that the department has ever reported in more than half a century of statistics, where monthly starts typically exceeded an annual rate of 1m. Moreover, August is well below the peak of 2.27m reached in January 2006.

New housing is a key end market for the chemical industry, driving demand for polyvinyl chloride (PVC); nylon for carpet, flexible and rigid polyurethane foams, paints and coatings, titanium dioxide (TiO2) pigment, adhesives and sealants; and expandable polystyrene (EPS) for insulation.

The American Chemistry Council (ACC) estimates that each new home built represents some $15,000 (€10,950) worth of chemicals and derivatives used in the structure or in the production of component materials.

"Housing, of course, is in the toilet and is expected to remain there for the remainder of 2011," one EPS buyer said. "Housing is a major portion of the EPS industry. It varies from geographic region to geographic region, but it is a substantial part of our business."

In the Phoenix, Arizona, and Las Vegas, Nevada, new residential construction was the bulk of the company's business, "but that area tanked two years ago", the buyer said.

The EPS industry is now focusing on renovations versus new construction, the buyer said, "but that market just hasn't been able to pick up the slack".

Areas with slightly more potential for growth are commercial roofing, as well as geofoam, which is used as filler material instead of dirt for the construction of highways, bridges and runways.

"We are trying to get used to our new reality," the buyer said.

A nylon and acrylonitrile (ACN) buyer said that demand for carpet materials is down.

A nylon 6,6 buyer said that 5–10% of the resin he handles is used in new-house construction. His company and others have learned to exclude new housing starts as part of their business and to concentrate on other end markets.

Although the housing market has not helped the US chemical industry, other trends have helped offset the drop in demand from that sector, said Martha Moore, the ACC's senior director for policy analysis and economics.

For example, the advent of shale gas has lowered both energy and feedstock ethylene costs for PVC producers. This has given US firms a global competitive advantage.

The resurgent automotive industry has increased demand for other paints and coatings as well as for resins and synthetic rubber.

Consumers are replacing old vehicles, and businesses are buying automobiles for their fleets, Moore said.

Although the upturn in the US automobile industry and export sales are encouraging, housing is still an important chemical end market, and the prospects for the industry are not good.

In fact, the ACC expects the US will report just 590,000 new housing starts for this year, unchanged from 2010.

Housing-start statistics have been sputtering at roughly half a million for more than a year, and several trends are holding back the industry, Moore said.

The nation's persistently high unemployment rate and low salary growth are both discouraging consumers from buying houses, she said.

The US still has a high inventory of foreclosed homes, which is holding down pricing, Moore said. Moreover, the nation has relatively large inventories of new and existing houses, which is also pressuring prices.

Also, consumer attitudes have moved away from owning a house, Moore said. Instead, people are choosing to rent.

This has benefitted apartment construction, but it comes at the expense of the housing industry, she said.

Yet the housing industry does have some small bright spots, Moore said. Borrowers who can qualify for mortgages are securing low rates.

The steep decline in house prices have made them more affordable, she said.

And the US is creating jobs in some isolated parts of the country.

"You do need new housing where there is job growth," Moore said. "You can't bring your house with you."

Additional reporting by Wesley Busch, Joe Kamalick and Michelle Klump

($1 = €0.73)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Al Greenwood
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