NEW YORK (ICIS)--The US economy is heading into 2021 in resilient shape, tested by the ongoing coronavirus pandemic but on a solid path to recovery, boding well for the US chemicals industry.
The rollout of highly effective vaccines, while so far slower than anticipated, is expected to accelerate through the year, providing a steady tailwind.
And the $900bn stimulus plan signed off in late December should kick start consumer spending again - just in time as US retail sales have rolled over in the past three months following a string of robust gains from the April 2020 low.
As the Biden administration takes office, all eyes are on the next batch of stimulus plans, as the Democrats have also taken control of both houses of Congress, making it more likely that additional fiscal stimulus is on its way.
US President Biden has already unveiled another $1.9trn stimulus plan including additional direct payments to individuals (with income limits), enhanced unemployment benefits, state and local government aid, and funds for vaccine distribution and testing.
But more relevant to the chemical industry, Biden is expected to introduce a massive infrastructure plan in a meeting of the first joint session of Congress in February.
If it is anything similar to the $2trn infrastructure plan announced during the campaign which includes major investment in transportation including automotive, as well as housing and construction, this has the potential to provide a significant boost to chemicals demand.
US retail sales fell 0.7% in December 2020 after a decline of 1.4% in November. However, this was 2.9% higher than in December 2019. Notable year-on-year gains were in motor vehicles and parts (+10.1%), building material and garden equipment supplies (+17.0%) and nonstore retailers (ecommerce, +19.2%).
The US unemployment rate in December was unchanged from November at 6.7% after a decline in nonfarm payrolls of 140,000 reflecting additional lockdowns amid rising coronavirus cases.
Manufacturing continues to be a standout with the latest December reading of the US ISM Manufacturing PMI jumping to 60.7 from 57.5 in November, marking the eighth consecutive months of expansion (above 50) and the highest level since August 2018. The ISM Services PMI rose to 57.2 % in December versus 55.9 in November.
Manufacturing exports in particular continue to get an uplift from the weaker US dollar as this makes US goods more competitive abroad. The US Dollar Index, which measures the value of the US dollar versus a basket of international currencies, has declined about 7.4% year on year.
The resurgence in the US manufacturing PMI since the April pandemic low bodes well for chemical company earnings in 2021, noted KeyBanc Capital Markets analyst Aleksey Yefremov.
“Manufacturing cycles that drive chemicals trading multiples typically last two-plus years. In the current cycle, PMIs started improving in H2 2019, but were interrupted by the coronavirus crisis. The need to rebuild inventories, and government support are likely to sustain growth well into 2021, in our view,” said Yefremov in a research note.
US housing starts jumped 5.8% in December to a seasonally adjusted annual rate (SAAR) of 1.67m and are up 5.2% from a year ago, supported by low mortgage rates. Single-family starts - the largest segment of housing - surged 12.0% year on year.
US light vehicle sales rebounded 4.1% in December to a SAAR of 16.3m units after a decline of 4.4 % in November to 15.6m units. Sales were still down 3.2% year-on-year.
The American Chemistry Council’s (ACC) Chemical Activity Barometer (CAB) - the trade group’s leading indicator for US industrial production - rose 1.1% in December on a three-month moving average basis, following a similar gain in November. The index is down 1.1% year on year.
“With eight consecutive months of gains, the December CAB reading is consistent with recovery in the US economy,” said ACC’s chief economist Kevin Swift.
US GDP rebounded a record 33.1% in the third quarter after a historic 31.4% plunge in Q2. For Q4, GDP growth is expected to moderate to about 3.7%, bringing full-year 2020 GDP to -3.5%.
Economists are turning more optimistic, lifting consensus GDP forecasts to 4.2% growth for 2021 versus 4.0% a month ago. However, the year is expected to start out weaker with Q1 GDP growth of 2.3% followed by more robust gains through year-end.
Chemicals, along with other materials and industrial sectors, tend to see the strongest earnings growth as well as stock price gains in the early stages of an economic recovery.
Bernstein analyst Jonas Oxgaard calls the 2021 outlook for US chemicals “promising, with early cycle positioning adding to secular tailwinds”.
“We’re overall positive on chemicals, especially for companies that can benefit from the ‘early cycle’ trade while benefiting from other secular trends, including strong agriculture, hydrogen or internal improvements,” said Oxgaard in a research note.
“We expect the dominant theme for investors in 2021 will be the recovery, and we expect they will spend most of H1 figuring out what the ‘new normal’ is,” he added.
Insight article by Joseph Chang