INSIGHT: Outright optimism for US economic and chemical outlook

14 January 2014 15:53  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--You would hardly characterise Kevin Swift as a wild-eyed optimist. The chief economist of the American Chemistry Council (ACC) and aficionado of financial history has seen his share of economic and chemical cycles. And prognostications, even through the most rose-coloured lenses of those in his profession, tend to be heavily caveated.

So when Swift projects the most positive outlook I can remember (in almost 17 years covering the industry) for both the US economy and the chemical sector for 2014, it’s worth taking notice.

For once, it’s not cautious optimism – just outright optimism.

This is in contrast to the less bullish expectations by European chemical trade groups, which mainly expect growth but slow growth for their sectors and Europe’s economies.

Key US economic components such as industrial production, personal income and employment are set to improve further, in his view.

“2014 will be a year of improving fundamentals and we could see positive surprises. The risk is to the upside,” said Swift at a meeting of the Chemical Marketing & Economics Group in New York.

Manufacturing has driven the US economic recovery since 2009 and will continue to do so in the coming years. This has been aided in no small part by the US shale gas boom, he noted.

“We have reached a tipping point in manufacturing. This tipping point in downstream consumer industries [of the chemical sector] points to strong domestic demand, which also aids specialty chemicals,” said Swift.

The economist pointed to a slew of new manufacturing facilities being built in the US.

In the state of South Carolina, there are three new tyre production plants under construction by France-based Michelin, Bridgestone and Continental, along with an expansion of an existing plant by Michelin.

US-based steel maker Nucor started up its new direct reduced iron (DRI) facility in Louisiana in December 2013 which uses significant amounts of natural gas in the process. Austria’s Voestalpine also plans to build a DRI plant in Texas for start-up by 2016.

US chemical manufacturing is also undergoing an unprecedented boom.

The number of US chemical projects planned because of low-cost shale gas feedstock and energy will likely surge to a total of 150-175, representing well in excess of $110bn in investment, according to Swift.

“The US is truly experiencing a new wave of investment in chemicals, with 54% of the current $93bn in planned new projects related to shale gas representing foreign direct investment,” said Swift.

Since around 2011, there have been 136 chemical projects announced as a result of the US shale gas boom, noted Swift. These include new projects as well as capacity expansions, some of which have been completed.

“These have mostly been in bulk petrochemicals, fertilizers and resins. But there will be more announced downstream,” said Swift.

The tally comprises projects that the ACC believes have been planned as result of renewed competitiveness from US shale gas as both a feedstock and as an energy source. This includes chlor-alkali, as US shale gas has lowered electricity prices, a major cost component in production.

The 136 projects do not include other chemical projects planned that are unrelated to US shale gas, noted the economist.

Swift projects 2016 as the peak year for capital investment, although shortages in skilled labour and other engineering and construction (E&C) resources could push this back to 2017 or 2018.

Much of the investment in the US will go into boosting the production of polymers. US plastics exports are expected to jump from 10-12% of total production a decade ago, and around 20-21% today, to about 35% by 2023, said the economist.

Along with the US, “the global industrial cycle is beginning to turn upwards,” with Europe now emerging from its second recession and China and emerging markets poised to improve, he added. Inflationary pressure is largely non-existent, and monetary policy is accommodative worldwide, “with various versions of QE [quantitative easing]”.

For the strong US economic progress since 2009, “nothing on the horizon suggests that this will end. We should see at least a couple more years of a good run,” he said.

So what could derail the US economy’s momentum?

Another shift down in China’s growth rate caused by excessive debt and resulting credit contraction, and a monetary policy shift towards tightening credit by the US Federal Reserve appear to be the main risks – the known unknowns.

But developments in these areas and elsewhere must be gauged. When a major downturn strikes, it’s rarely telegraphed.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

Author: Joe Chang

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