Commentary: Amid a benign US economy, beware a shift in global consumption trends

Amid a benign US economic environment, chemical sector production volumes are poised to grow faster than GDP, especially as new projects based on the shale gas competitive advantage ramp up in the coming years.

Despite the major decline in oil prices since Q4 2014, “the US chemical industry is still very competitive. Even with oil down around 50% from its highs, we are still seeing new project announcements,” said American Chemistry Council (ACC) chief economist Kevin Swift at the ACC annual meeting in Colorado Springs, Colorado, US.

There are 231 chemicals and polymers projects in the US based on shale gas totaling $142bn in investment, he noted. And much of the capacity of major new US plants is expected to be exported – as much as around 65%, said Swift.

The real growth in demand for petrochemicals such as methanol will be “away from the US, and exports will go to emerging markets such as China. A big chunk of the new [methanol] capacity will be export oriented,” said Mark Rohr, chairman and CEO of US-based Celanese, at the ACC meeting press conference.

“Basic chemicals will have to go to emerging economies. We are kind of saturated here,” he added.

American Chemistry Council ACC CEO Cal Dooley addresses participants at the group’s annual meeting in Colorado Springs

Production of US basic chemicals should grow by rates exceeding 5% in 2017-2019, up from 3.1% in 2015, said the ACC’s Swift.

Overall US chemicals production is expected to rise 3.2% in 2015 and 3.0% in 2016 based on the ACC’s Mid-Year Situation and Outlook report released at its annual meeting. “This is slightly down from ACC’s 2014 outlook as first quarter softness and the strong US dollar weigh on expectations,” said Swift.

Not all is coming up roses. On a global basis, the economic picture is mixed, with Europe on the mend while China remains mired in slow growth mode, and Brazil enters a recession.

“The US [economy] is steady but it certainly has not rebounded as much as we would have liked. In Europe, sentiment is better versus 2014, with customers more confident,” said Rohr. Automotive and coatings markets are particularly strong in Europe thus far in 2015, he noted.

But Asia “is a different story”. While China’s official GDP growth is around 7%, “we don’t even see 5% chemical growth,” said Rohr. “China started the year slow, and after Chinese New Year, it’s been steady but not very strong.”

And global consumption trends appear to be shifting – something that could cause chemicals and polymers growth to actually lag GDP.

The methanol product chain, in which US-based Celanese plays through its acetyls business, had been “classically growing at GDP, but it doesn’t appear to be growing as fast anymore. Basic chemistry is falling behind,” said Rohr.

“The correlation between global GDP and chemical sales had been strong. If China grew at 7-9%, we’d see 7-9% growth there. But that’s not happening today. The nature of demand has changed,” said Rohr.

“We are moving away from a consumptive trend. It may also be related to demographics,” he added. While this doesn’t appear to be impacting the US market, it is a trend “we need to be conscious of”.

As economies such as China’s evolve away from a goods-oriented, or export market, to one focused more on the domestic market with an inherently larger services component, that reduces the chemical content needed, said the ACC’s Swift.

And demographic headwinds are playing a part. “China’s working age population has peaked or will soon peak. Longer term, GDP growth could be more like 5-6%/year with 7% a good year for the Chinese economy,” said Swift.

“The US is not facing a demographic winter yet such as in Japan and Russia. We still have immigration. But still the labour force growth rate is not what it used to be,” he added.

A slowdown in global consumption of chemicals relative to GDP bears watching, especially in the face of massive capacity expansions in the US based on shale gas.

Even as the US will likely remain cost advantaged versus its global counterparts in the ethylene and methanol chains, the product will have to go somewhere – hopefully to places where there is robust demand growth.