AFPM: Consumer spending to boost chemicals

Al Greenwood

20-Mar-2015

The US chemicals industry is ready for a good year as low oil prices further stimulate consumer demand and boost national GDP growth

The US chemical industry should grow by 4% this year – its best rate in years – because key end-use markets will either continue to expand or start to recover. However, not all end-use markets will prosper this year.

The decline in oil prices has caused a sharp drop in oil rig count, which will lower demand for oilfield chemicals. The decline could leave some companies with high-cost inventory on their books.

Meanwhile, the strengthening dollar will make exports more expensive – although US producers will likely maintain their feedstock advantage.

 

Lower oil prices are predicted to stimulate cars sales and motoring activity

Copyright: Rex Features

Overall, the prospects are good for the industry, according to the American Chemistry Council (ACC), which put out the forecast for 4% growth for the chemical sector, excluding pharmaceuticals.

This year’s growth rate compares with 2.4% in 2014, 2.7% in 2013 and 1.9% in 2012, says Martha Gilchrist Moore, senior director, policy analysis and economics, for the ACC. The outlook for the US chemical industry is so strong because the overall economy will also grow. ACC expects US GDP to rise by 3.2% this year, says Gilchrist Moore. The latest estimate for US GDP growth from the International Monetary Fund (IMF) is even higher, at 3.6%.

A good part of that growth will come from spending from consumers, who are enjoying higher wages and employment as well as lower fuel prices, explains Gilchrist Moore. “The overall net [effect] of a virtuous cycle is going to kick in.”

Like others, Gilchrist Moore expects US consumers will spend some of the money they save on fuel. However, consumer spending is not the only bright spot in the US economy. New home construction could hit a milestone this year. ACC expects housing starts to reach 1.2m, the highest since 2007 – although still below the peak of 2.07m in 2005.

Housing is crucial because so much chemistry goes into construction, from polyvinyl chloride (PVC) to paints and coatings as well as synthetic fibres. ACC estimates that each new home built represents some $15,000 worth of chemicals.

Automobiles, another major chemical end-use market, should continue to perform well in the US. The automobile industry began recovering early from the recession and this year, ACC expects light-vehicle sales to reach 16.9m.

Like housing, automobiles are an important chemical end market, and ACC estimates each vehicle contains an average of $3,500 worth of chemicals. These include acrylonitrile-butadiene styrene (ABS), polycarbonate (PC) and nylon; paints and coatings; and styrene-butadiene-rubber (SBR) in tyre production.

OILFIELD CHEMICALS CHALLENGED

 

Consumer spending is up, as purchasers have more money in their pockets

Copyright: Rex Features

However, the US chemical industry will still face some challenges this year. Falling oil prices have caused a sharp decline in rig counts. That, in turn, has lowered demand for oilfield chemicals. In the US, February contract prices for triethylene glycol (TEG) fell 11.5% in part because of lower demand for the use of the product in the oilfields.

Moody’s Investor Services has warned that the decline in oil prices could also slow down demand for proppants, which can be coated with epoxy or phenolic resins.

Falling oil prices have also caused prices for downstream chemicals to fall. This led to destocking at the end of 2014, as several chemical companies noted during their 
recent earnings calls with investors. These Consumer same companies confirmed, however, that destocking has ended and order patterns have returned to normal.

Other oil-related threats remain, however. Companies could be stuck with inventories that were built up when prices were high, notes Pam Schlosser, US chemicals leader for PricewaterhouseCoopers (PwC). Companies could also be locked into long-term contracts obligating them to buy fuel and feedstock at earlier, higher prices, she adds.

In some cases, the decline in prices has eroded some of the margins of US-made products. Naphtha prices have fallen with oil, reducing costs for foreign producers, who overwhelmingly rely on it as a feedstock. US companies rely heavily on natural gas liquids (NGLs) for feedstocks. Prices for these, however, have also declined, and Gilchrist Moore says the US has maintained its cost advantage, even if margins have eroded.

Low oil prices have not slowed down one of the biggest trends in the chemical industry, the construction of large-scale petrochemical plants by companies. So far, no company has pulled plans for new chemical capacity, Gilchrist Moore says. While Sasol halted plans for a gas-to-liquids (GTL) plant, this was a fuel project.

Ultimately, low oil prices could benefit the chemical industry. They will lower shipping costs for chemicals and finished products. For companies that rely on oil-based feedstock, they could also see their costs decline. Most important is the wide-spread expectation that low prices will act as an economic stimulus, boosting GDP and, subsequently, demand for chemicals.

BENEFITS FROM LOW OIL PRICES
CEOs such as Andrew Liveris of Dow Chemical and Peter Huntsman of Huntsman Corp have said repeatedly that demand for their products will ultimately increase because of the stimulus caused by low oil prices. ACC shares this view as well.

In addition to reducing costs, benefitting consumers and stimulating the economy, low oil prices should also restrain inflation, ACC said in its year-end report on the chemical industry.

Low oil prices could also benefit the industry in more obscure ways. Earlier this year, Charles Shaver, CEO of Axalta Coatings Systems, said low fuel prices will encourage people to drive more. As people drive more, they have a greater likelihood to get into car wrecks, he said. That, in turn, would increase demand for coatings from body shops. Higher mileage could also increase demand for oil and fuel additives as well as tyres, the main end market for SBR.

Another big trend this year is the strengthening of the US dollar. Like oil prices, the strong dollar has given chemical companies a mixed bag of benefits and costs. During the recent earnings season, several companies reported foreign-exchange charges they attributed the appreciation of the dollar.

In time, the strong dollar could erode the feedstock advantage that US producers have enjoyed against their foreign competitors. Such currency-driven effects on trade, however, typically take time, says Gilchrist Moore. So far, ACC has not seen the stronger dollar disrupt exports.

The same would go for US chemical imports, which would become cheaper and provide those companies with a benefit.

Nonetheless, the US is a net chemical exporter once pharmaceuticals are excluded, according to ACC. That trade surplus likely reached $37bn in 2014. The strong US dollar could erode that surplus.


Chemical ceos are optimistic for M&A
The same factors that are benefitting the chemical industry should encourage more merger and acquisition (M&A) deals in the sector, notes Pam Schlosser of PwC. The outlook for the US automobile sector, the housing industry and consumer spending all bode well for deals.

“All of the macroeconomic indicators would show that it should be a strong year,” she says.

PwC’s recent CEO sentiment survey also points to a strong 2015. Among the CEOs in the chemical industry, 72% said there were more growth opportunities now than there were three years ago, according to PwC. For the first time in several years, the US was in the top market for growth, at 53%, ranking slightly above China.

“If chemical CEOs feel more optimistic about growth opportunities, then clearly they are thinking about organic and inorganic growth,” Schlosser believes. “M&A will still be a strategic lever for chemical CEOs.”

Activist shareholders, a prominent trend in 2014 M&A – will likely continue both for chemicals and for US companies as a whole, Schlosser says. She would not comment about specific companies, in keeping with PwC policy, but 2014 saw several prominent companies having to deal with activist shareholders. Dow Chemical contended with Daniel Loeb’s Third Point and DuPont with Nelson Peltz’s Trian Fund Management.

However, not all of these activist shareholders will result in contentious fights, Schlosser says. For example, two funds, Corvex Management and Soroban Capital Partners, raised their stakes in Williams and released a letter outlining ways to improve the company. Williams later reached an agreement and appointed two activist investors to its board of directors. No proxy fight ensued.

Meanwhile, WR Grace is spinning off its construction-materials segment with no activist pressure.

Overall, 2014 was a strong year and 2015 should build on that momentum. Corporate balance streets are strong, leaving companies with built-up cash to pursue deals. At the same time, financing costs remain low.

Peter Young, president of investment bank Young & Partners, has estimated that 2014 closed with at least $40bn worth of completed deals, with nearly 90 transactions exceeding $25m.

Chemical companies as well as private-equity firms will continue to look for deals. The biggest upcoming deals include DuPont’s spin-off of Chemours, which will include the company’s titanium dioxide (TiO2) and fluoropolymer segments. DuPont should complete the spin-off in mid-2015, and Chemours’s stock will trade on the New York Stock Exchange (NYSE).

Dow is carving out its chlorine, chlorinated organics and epoxy resins businesses, preparing them for a sale, a joint venture or a spin-off in what could be several deals. Dow expects to have signed agreements in place by the second quarter of 2015.

Among buyers, private equity firm SK Capital Partners is targeting chemical carve-out or orphan businesses with its new $1bn fund. SK Capital has built a ­portfolio of chemical assets that includes butadiene (BD) and C4 specialties producer TPC Group, nylon producer Ascend Performance Materials, liquid sulphur dioxide producer Calabrian and Aristech Acrylics.

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