Commentary: Global chemical outlook positive for 2015

Happy New Year! After an eventful 2014 for the global chemical industry, particularly towards the end with the accelerating collapse in crude oil prices, it’s time to recalibrate and look forward to 2015 – a year which should feature many interesting shifts in the macro environment.

Surely risks abound – from geopolitical turmoil, the crude oil price plunge and its many implications, and China’s continuing growth slowdown and uncertain outlook. Substantially lower oil prices are taking most chemical and polymers prices down worldwide. No doubt this will compress profit margins in commodity chemicals, even as input costs from oil and its derivatives decline.

When oil and raw material costs are on the decline, the pricing conversation is dictated by buyers – buyers looking for price breaks. In contrast, when oil prices are on the upswing, the sellers dictate the pricing talks.

In the US, where chemical and polymers prices follow crude oil while costs are based on natural gas liquids (NGLs), stock prices for chemical companies most leveraged to cheap shale gas – LyondellBasell and Westlake Chemical – have fallen the hardest. Note that they had the sharpest run-ups as well in the past two years, trouncing the broader market benchmarks and their peers. No doubt the stock market is telegraphing a compression in margins.

The oil price decline could also bust a number of marginal US shale oil exploration and production companies, leading to a potential disruption in credit markets as many have borrowed to fund expansions.

On a macroeconomic level, the US is continuing ahead with positive momentum, but a good chunk of the growth has been related to the energy boom. The ultimate effects have yet to be seen.

Europe is staggering along, with major pockets of weakness and a potential euro crisis triggered by (guess who?) Greece once again. Yet the European Central Bank (ECB) is leaning towards its own quantitative easing (QE) programme, with noted major opposition from Germany. If the ECB can pull off a big QE programme and trigger inflation in asset values as the US has seen, it will produce a much needed tailwind for the global economy.

And a slowdown in China economic growth is no longer considered a temporary phenomenon, but a long-term trend as the government aims to transform the economy into one more focused on domestic consumption and efficient production.

Still, the overall picture is modestly positive. Keep a close eye on the manufacturing Purchasing Managers’ Indexes (PMIs) of the US, eurozone and China. For China, use the HSBC Markit PMI rather than the official China index. Right now, all are in expansion mode (above 50), with the US strongly ahead and the eurozone and China barely above the threshold. The manufacturing PMI leading indicators are not triggering alarm bells just yet.

In the US, certain major planned projects such as ethane crackers may be put on the shelf. They have been based on both low NGL prices and high crude oil prices (which keep chemical prices high). But that spread has contracted (see page 12). Six are under construction (Sasol imminent) already but another six have yet to break ground.

Yet overall capital spending in the US chemical sector is projected to surge by almost 12% in 2014 to over $33bn, and then continue to grow at strong levels of around 9%/year through 2017, according to Kevin Swift, chief economist of the American Chemistry Council (ACC).

There’s no question that lower oil prices will dent US petrochemical competitiveness which is based on NGLs. But it is unlikely to kill it off.