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US Chemicals Still Behind 2007

Business, China, Company Strategy, Economics, Middle East, US
By John Richardson on 26-Jul-2012

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 By John Richardson

US chemicals production remains way below its pre-crisis 2007 level but production in Asia-Pacific, after a brief blip in 2009, continues to soar, according to these charts from the American Chemistry Council.

Whereas US producers have carried out few capacity expansions since 2007 and are runnning existing plants at lower operating rates, the Asia-Pacific industry has added a great deal of capacity. This has helped meet strong demand growth

Weaker US production reflects what is happening in the American economy.

Current macroeconomic indicators point to deep structural problems with the economy, from anaemic wage growth for the vast majority of Americans to a persistently high unemployment rate.

And the US might fall off a fiscal cliff early next year, when tax cuts for the rich could come to an end as spending cuts are also enforced.

Housing debt left over from the sub-prime crisis remains a drag on the economy and yet the White House is unwilling to push-through debt write-downs, writes Edward Luce in the Financial Times.

Demographics are holding back demand. And so, in the absence of another Babyboomer boost to the economy, which of course isn’t going to happen, a major reduction in consumer debt seems a good way to get the economy going again.

Sadly, though, it seems unlikely that any future White House administration would be willing to compel the banks to take big losses on mortgages, given the close relationship between both the major political parties and Wall Street.

And yet the US chemicals industry is planning a major wave of expansions.

Cheap feedstock is a big motivating factor behind these planned investments.

But if the US economy fails to achieve a sustained recovery, where is the output from all the new plants going to go?

“Exports” is the answer that many an executive would no doubt give.

What happens, though, if Asia-Pacific chemicals production keeps rising? 

China will continue to add capacity, and run it hard, regardless of economics as Sinopec’s strategy suggests.

Elsewhere in Asia-Pacific, and also in the Middle East, further capacity might well be added for social and political as well as economic reasons.

Assumptions about emerging market economic growth also need to be challenged.