INSIGHT: US economic stimulus may squeeze already tight chem markets

Author: Al Greenwood

2021/01/21

HOUSTON (ICIS)--The economic stimulus packages being proposed in the US could further tighten in markets for several plastics and chemicals.

Prices for many of these materials were already rising amid a boom in US residential construction and a change in consumer buying habits.

US President Joe Biden intends to propose a two-part stimulus package. The first, worth $1.9tr, is made up mostly of direct payments, such as the $1,400 the government would give to many consumers.

If approved, this $1.9tr proposal would come on top of the $900bn package that the US adopted in December. This package includes checks worth up to $600.

Biden plans to unveil another stimulus package in February during his first appearance before a joint session of Congress. This package could total $2tr and it would target infrastructure projects.

In all, the US could approve nearly $5tr worth of economic stimulus in the span of a few months.

TIGHT CHEMICAL MARKETS
Many chemical markets in the US were tight even before all of this stimulus, as illustrated by the ICIS Petrochemical Index (IPEX). The index is based on contract and monthly average spot prices in a basket of 12 chemicals and polymers.

The US Gulf Coast IPEX reached 182.7 in December, the most recent month available. That's up by 11.6% from November and 13.2% from December 2019.

In fact, the Gulf Coast IPEX recovered all of the ground it lost during the pandemic. The last time it was this high was in October 2019, when it reached 186.8.

The Global IPEX staged an even stronger recovery, reaching levels not seen since May 2019.

Prices for US contracts for polymers reflect this, as shown in the assessments for polyethylene (PE) and polypropylene (PP).

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The rise in prices reflect disruptions that hurricanes caused to polyolefin production earlier in the year as well as changing buying habits on the part of consumers. These new buying habits are the result of the coronavirus.

Another big contributor to demand is from personal protective equipment (PPE) as well as packaging used for health and cleaning products.

For other chemicals and polymers, record prices for lumber are encouraging companies to find alternatives to wood.

In the third quarter of 2020, lumber prices reached levels never seen before, according a report from Wood Resources International (WRI).

Prices for southern pine rose by 160% from the 2020's low in April to September. In the western US, Douglas-fir lumber prices nearly doubled during the same period.

These higher prices have led to companies using polyvinyl chloride (PVC) for window and door profiles.

Even without the spike in lumber prices, demand for chemicals and plastics used in construction would have risen because of the increase in home construction in the US.

The number of building permits issued in the US reached an annual rate of nearly 1.64m in November 2020, according to the US Census Bureau.

The last time the US reached such a high rate was in December 2006.

The trends driving housing demand include the earlier batch of economic aide that the US adopted earlier in 2020 and the decline in mortgage rates. The latter are near all-time lows, according to Freddie Mac, a US-based company that buys mortgages from lenders who issue the initial loans to homebuyers.

Given the increase in residential construction, US PVC contract prices for general-purpose and pipe-grade material have been on a tear.

MORE STIMULUS, MORE CHEM DEMAND
The proposed stimulus packages from President Biden could further increase demand for chemicals and polymers by giving consumers more money to spend and by funding more infrastructure projects.

While Biden will not unveil this infrastructure programme until February, it could resemble the $2tr proposal he made in his campaign platform.

This included a $400bn procurement investment to “Buy American” products, materials and services to support US manufacturing.

Plus another $300bn in R&D and “breakthrough technologies” ranging from electric vehicle (EV) technology to lightweight materials to 5G and AI (artificial intelligence).

This infrastructure component will hit polymers used in pipes, such as PE and PVC.

It could also increase demand for unsaturated polyester resins (UPR), which are made with maleic anhydride (MA) and phthalic anhydride (PA).

These resins are used in cured-in-place pipes (CIPP), a method used to repair existing water, gas, sewer and chemical pipelines.

UPRs are also used in wind turbines and coatings

One other source for UPR demand is the boating industry. A good proxy for this is Brunswick, a US company that is publicly traded. Its stock has been trading near record levels.

UPR OUTLOOK
Valentina Cherubin, ICIs market analyst, is cautious about the prospects of the US adopting an infrastructure programme, warning that the process could be slow and bureaucratic.

Lulls in the US and Europe will be offset by growth in Asia, whose infrastructure market represents 60% of world UPR demand, Cherubin said.

"The region can count on the support coming from the government and also from the private sector, which is favourable to investing the private capital for investment into infrastructure."

UPR demand will get another boost from residential construction, she said. In all, ICIS expects global UPR demand to grow at 3-4%, she said.

INFLATION CONCERNS
The rise in chemical prices is part of a larger rally in commodities. US corn futures prices reached their highest level in seven-and-a-half years.

Copper prices have surged. Brent crude futures for March settled at $56.08/bbl, getting close to their levels at the start of 2020, when it was trading above $68/bbl.

Concerns are rising that inflation will spike because of the extraordinary fiscal stimulus of the Biden economic packages and the monetary stimulus provided by the Federal Reserve.

The Economist recently raised such concerns.

Worries about excessive stimulus have been ongoing since the financial crisis of 2007-2008. Despite the financial aid and low interest rates of the period, inflation languished below the targets of central banks of most major economies.

It remains to be seen if this time will be different.

Front page picture: The Capitol in Washington on Inauguration Day
Source: Rebecca Blackwell/AP/Shutterstock

By Al Greenwood

Additional reporting by Joseph Chang

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