Will the US housing slump impact chemicals?

Housing and autos have always been key drivers for the US chemicals industry. We should be concerned if the housing market weakens further.Yesterday saw two significant announcements:

• Home Depot, the world’s largest home improvement store chain, announced that existing store sales were down around 5% because of the US housing slump. And CEO Frank Blake said he saw ‘continuing headwinds through 2007 and probably some into 2008 as well’.

• Standard and Poor’s (S&P), the ratings agency, threatened to downgrade $12bn worth of securities backed by sub-prime housing mortgages. Echoing Blake, the company said ‘We do not see the poor performance abating,’ and added that losses ‘remain in excess of historical precedents and our initial assumptions’.

The announcements have implications both for chemical demand, and for chemical stock prices.

On the demand side, a slowing housing market impacts sales of paints, consumer durables and furnishings, as well as building materials. And if demand is softer, then it also becomes harder to protect margins by raising prices. So it will be a struggle to compensate for recent oil price hikes.

On the financial side, things are shaping up to be even more difficult. Estimates of sub-prime housing mortgage losses vary between the $52bn estimated by Credit Suisse to $90bn by Deutsche Bank. And already one can hear the sound of stable doors being slammed, as regulators and lenders suddenly start to insist on higher lending standards.

The implication is that pension funds and other investors will become more nervous. They may no longer automatically support high-priced acquisitions of chemical companies which rely on high debt levels. In turn, stock prices may no longer benefit from the automatic 30% bid premium that has been attached to so many companies.

However, as my friend Kevin Swift of the American Chemistry Council reminded ICIS news readers last week “steady gains in employment coupled with rising earnings – from a tight labour market – are largely supporting consumer spending and the economy”.

But the announcements from Home Depot and S&P are warning signs that the housing market slump could still undermine performance in the next few months.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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