Commentary: An inauspicious start to 2016 for chemicals and the economy

Source: ECN


It’s been a less than auspicious start to the New Year. Weak China manufacturing data triggered a 7% slide in China’s benchmark stock market and a trading halt on 4 January, along with a repeat on 7 January spurred by another 0.5% devaluation of the yuan, with the pain spreading across the globe. Crude oil continued its slide to below $35/bbl for both Brent and WTI, boding ill for chemical prices.

And the “lower for longer” mantra applies not just to crude oil, but increasingly to the global economy.

Key themes going into 2016 are the China slowdown and currency devaluation, the commodities collapse led by crude oil, US interest rate hikes, recession in Brazil and Russia, and greater geopolitical risk.

Manufacturing activity is clearly slowing in China and the US. The Caixin/Markit China Manufacturing PMI (Purchasing Managers’ Index), released on 4 January, fell further to 48.2 for December versus 48.6 in November, representing the 10th consecutive month of contraction.

Any reading above 50 indicates expansion in the manufacturing economy; under 50 indicates contraction.

And US momentum has not only slowed through 2015, but has now turned negative for two months in a row. The ISM US Manufacturing PMI fell in lockstep with China to 48.2 for December from 48.6 in November.

The downdraft in US and Europe equity markets on 4 January from the China fallout resumed on 6 January, with the Euro Stoxx 50 Index down 1.9%, and the US S&P 500 index off 1.3%.


Taking more than their fair share of lumps were chemical companies, part of the battered materials group. US firms suffered much worse than their European counterparts.

In the US, big stock price declines were seen on 6 January from Axiall, (-11.0%), Chemours (-5.5%), Trinseo (-5.0%), Ferro (-5.0%), Westlake Chemical (-4.9%), Methanex (-4.9%), Huntsman (-4.8%), LyondellBasell (-4.7%), Albemarle (-4.4%) and FMC (-4.2%). Further falls on the order of 3-6% for many chemical stocks were seen on the morning of 7 January.

Axiall’s outsized decline was exacerbated by a big cut in earnings estimates. Cowen analyst Charles Neivert cut his 2015 earnings per share (EPS) estimate on Axiall by a modest $0.03, to $0.75, but took the axe to his 2016 forecast by a whopping $0.89, to $0.93.

“The cuts are primarily a result of planned outages stemming from weak export markets and a well supplied [US] domestic market in caustic soda and PVC [polyvinyl chloride],” said Neivert.


American Chemistry Council chief economist Kevin Swift remains positive on the US chemical sector outlook even against the backdrop of slower global economic growth (see page 9).

Swift expects US chemical production (excluding pharmaceuticals) to rise 3.1% in 2016 after a 3.8% gain in 2015. Further gains of 4.7% in 2017 and 5.3% in 2018 are expected as major new capacity starts up.

“In the long term, the US chemical industry will grow faster than the overall US economy,” said Swift. US GDP is expected to rise just 2.6% annually in 2016-2018.

Paul Hodges, chairman of consultancy International eChem, sees crude oil prices collapsing further in 2016, with chemical prices falling in tandem, partly spurred by the removal of global monetary and fiscal stimulus.

“There will be an end to the tidal wave of lending of around $35 trillion over the past five-to-six years, which inflated values, and a return to the true fundamentals of supply and demand. Oil prices will return to their historical level of around $25-30/bbl,” said Hodges.

“Investments based on oil commanding a price premium over natural gas will have to be revisited,” he added.

And on that “lower for longer” theme applying to the global economy as well as oil, demographic headwinds will continue to weigh on demand, Hodges noted.

Additional reporting by Will Beacham in London