OUTLOOK ’22: US chemical equities likely to continue on upswing on strong demand

HOUSTON (ICIS)–Chemical equities are on track to end 2021 higher, as demand in key end markets continues, the upswing may likely continue into the new year as post-pandemic demand accelerates.

But several factors such as ongoing high inflation rates, the US Federal Reserve’s new monetary policy tilt, including the acceleration of the reduction of its monthly bond purchases, and the rise of the Omicron COVID-19 variant increase volatility. Not to mention the supply chain and logistics challenges that have left no sector of the economy untouched.

In a report detailing the 2022 chemical industry outlook, Deloitte said that strong demand for both commodity and specialty chemicals should keep prices robust as the industry moves into the new year.

However, the industry could face margin pressures due to supply chain challenges like raw material inflation and trucking issues, which could continue through the first half of 2022.

US CHEM VOLUMES & US GDP
US chemical volumes are expected to grow around 1.5% in 2021 and 3% in 2022, while shipments will likely increase 8% in 2021 and 2022, following a 13.5% decline in 2020.

High inflation has led to the US Federal Reserve to accelerate its tapering of asset purchases as it prepares to raise interest rates. A slowdown of economic growth in the US and global economy could put pressure on sensitive sectors such as chemicals.

US GDP is expected to grow by 4.4% in 2022, according to an end-year outlook by the American Chemistry Council (ACC). US industrial production will grow by 4.0% in 2022, after industrial production rose 5.5% in 2021, driven by a rebound in demand for goods.

Chemical demand is sensitive to GDP, so a slowdown or an uptick in the economy could impact stock prices for chemical companies in 2022.

GAINS FOR CHEMICAL EQUITIES
In 2020, chemical equities had big stock gains, despite the market shock the onset of the coronavirus pandemic caused. By the end of the year, US chemical stock prices jumped by 39.1% on average in Q4 2020, outperforming the broader market by 26.7%.

In 2021, this trend continued as chemical equities ended with strong gains due to strong chemical demand in key end-markets. Dow Jones Chemical Index (DJ Chems) and the S&P Chemical Index (S&P Chems) grew by double-digit percentages, observing the same trend the S&P 500 and the Dow Jones Industrial Average (DJIA) followed this year.

	4-Jan-21	as of 8 Dec 21	% change
S&P 500	3,700.65	4,701.21	27.04%
DJIA	30,223.89	35,754.75	18.30%
S&P Chems	739.99	905.99	22.43%
DJ Chems	737.57	884.76	19.96%

US chemical production expanded in 2021, as the post-lockdown spending surge boosted demand for chemicals and other goods and materials despite headwinds from the mid-February Winter Storm Uri and Hurricane Ida in August.

In early outlooks for 2022, Wall Street is already seeing great potential for chemical companies in the new year, as increases in health care, advanced polymers, recycled materials, construction and industrial demand amplify positive fundamentals.

OIL PRICES
The rise of the Omicron variant has impacted energy prices as several governments reimpose travel restrictions that may increase price volatility in the near term. The UK has reimposed its mask mandate on 9 December and started encouraging working-from-home arrangements, if possible.

As a rule of thumb, US chemical producers keep their cost advantage when oil prices are at least seven times higher than those for natural gas. A dip in the price of oil could reduce the size of that advantage.

Credit ratings firm Fitch Ratings revised its near-term forecast for Brent and West Texas Intermediate (WTI) to $71/bbl and $68/bbl respectively in 2022.

Oil demand recovered in 2021, almost to pre-pandemic levels, supported by the phasing out of lockdowns and increased economic activity.

Demand could weaken in Q1 2022 due to OPEC+’s decision to ramp up production by 400,000 bbl/day in January with the option to revise its plan if the market situation changes. The release of strategic oil reserves by the US and other nations will also have an impact.

Focus story by Janet Miranda

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