Global macroeconomics steady as US petrochemical wave kicks off

Source: ECN

2017/07/28

Global macroeconomic dynamics are largely steady or on the upswing as the US petrochemical capacity wave kicks into gear, providing a tailwind as companies attempt to place massive volumes of downstream polymers.

For the global economy, the International Monetary Fund (IMF) maintained its forecast of 3.5% GDP growth in 2017 and 3.6% in 2018 – not terribly exciting but a benign and stable backdrop. The US is actually now a laggard when it comes to economic activity, stuck in a 2% GDP growth world as tax reform and infrastructure spending are merely wishful concepts amid a growing storm of political controversies and a drawn-out and flailing health care reform push. The US automotive sector is particularly weak with a downcycle firmly under way.

The IMF now expects US GDP to rise by just 2.1% in both 2017 and 2018, down from 2.3% and 2.5%, respectively, from its previous forecast in April.

TRADE POLICY

Trade policy is a risk, as the North American Free Trade Agreement (NAFTA) is being renegotiated and the US administration is considering other protectionist measures on products such as steel and aluminium.

Trade is vital to the US chemical sector, as petrochemical and polymers capacity expansions ramp up on an unprecedented scale based on cheap shale gas.

From 2017-2018 eight new ethane crackers are expected to start up, featuring a total of 9.2m tonnes/year of ethylene capacity. There’s also another 1m tonnes/year of ethylene coming on through expansions and restarts in this timeframe. Downstream, it is primarily polyethylene (PE) that will be produced, and much of it for export. Key destinations will be Latin America, Asia, Europe and Africa.

US PE capacity is set to rise by 6.4m tonnes/year through 2019, accounting for plants already completed in 2017 or under construction, plus a planned 650,000 tonne/year unit by ExxonMobil Chemical where a final investment decision has yet to be made. If all the planned projects in the US and one in Canada (NOVA’s planned 450,000 tonne/year LLDPE project in Sarnia) are built, PE capacity would jump by 12m tonnes/year through 2022.

Trade is obviously critical to the US mega project business model. Already in overall chemicals (all trade figures exclude pharmaceuticals), the US exported $121bn of product in 2016. Canada and Mexico were the #1 and #2 destinations, receiving $20.4bn, and $19.2bn in US chemical imports, respectively, with China at #3 receiving $10.6bn in chemicals from the US.

CHINA OUTLOOK

For the key China economy, the IMF raised its 2017 GDP growth forecast to 6.7% from 6.6%, reflecting a strong 6.9% expansion in the first half. It also upped its 2018 China forecast to 6.4% from 6.2% as it expects the government to “delay the needed fiscal adjustment (especially by maintaining high public investment) to meet their target of doubling 2010 real GDP by 2020”. However, it noted this delay comes at the cost of increasing debt and overall risk.

The People’s Bank of China shows that Total Social Financing (TSF) more than tripled from $7.8tr in 2007 to $26.4tr in 2016, points out Paul Hodges, chairman of International eChem.

The risk is the impact on the economy as China eventually takes major steps to restrict the rampant growth in credit.

“If China continues to withdraw stimulus at the current rate, then commodity prices and inflation will continue to fall – just at the moment when western central banks are busy declaring victory over deflation and preparing to finally unwind their own swollen balance sheets,” said Hodges.

On a positive note, the Eurozone is coming to life, with expected 1.9% GDP growth in 2017 and 1.7% in 2018, upward revisions from 1.7% and 1.6% in the IMF’s previous forecast.

For the manufacturing sector in particular, all the big three regional purchasing managers’ indexes (PMIs) for the US, Eurozone and China, are in positive territory (above 50) in the latest readings, but China has been hugging the border line. Figures in early August are eagerly anticipated.