INSIGHT: ‘King Dollar’ poses growing threat to US chems, global economy

NEW YORK (ICIS)–The relentless surge in the US dollar to record or multi-decade highs against European and Asian currencies will be a greater headwind for US-based chemical company earnings going forward.

This is especially the case as major US chemical companies have meaningful exposure to global markets, not only through exports but production assets on the ground.

The latest spike in the US Dollar Index, which measures the dollar versus a basket of currencies, brings it up a stunning 22% from a year ago and up 19% just this year – a gargantuan move in the usually pedestrian foreign exchange (FX) market.

On 25 September, the US dollar hit a record high against the British pound and a more than 20-year high against the euro. Key Asian currencies – the Chinese yuan, Japanese yen and South Korean won – have also weakened significantly.

The direct impact of a super strong US dollar is twofold. First, it makes US exports more expensive (less competitive) in global markets. Second, for any sales and profits in foreign markets – whether from exports or production in those markets – they are translated back into fewer dollars.

Plus, there are indirect impacts. US manufactured goods exports – think motor vehicles and parts, machinery, electronic and computer products, medical equipment and aircraft and components – likewise become less competitive. This means lower US production and thus less demand for chemicals and resins that go into these goods.

US-based companies’ global sales exposure
Based on 2021 sales
	Europe	Asia	Latin America
Tronox	39%*	33%	7%***
Dow	36%**	18%	10%
LyondellBasell	20%	8%	3%
Trinseo	57%	22%	NA
Eastman	26%*	24%	6%
Westlake	7%	3%	NA
Chemours	22%*	29%	12%
Huntsman	27%	30%	NA
Celanese	36%	33%	4%
Olin	19%	NA	NA
PPG	32%*	18%	10%
DuPont	20%	49%	4%
Avient	25%	16%	9%

* EMEA (Europe, Middle East & Africa) / ** EMEAI (Europe, Middle East, Africa & India) / *** South and Central America / NOTE: Some companies disclose sales in regions/countries along with an ‘Other’ or ‘Rest of World’ category / Source: Companies, US SEC

“The high dollar makes US-produced goods more expensive in foreign markets, so exports would tend to fall below where they would have been otherwise,” said Kevin Swift, ICIS senior economist for global chemicals.

“However, helping US chemical producers is that oil and feedstocks are usually priced in dollars, which boosts the raw material costs of foreign producers,” he added.

US manufacturing will also likely feel more pressure in the domestic market from cheaper imports.

“The higher dollar makes foreign-produced goods less expensive delivered into the US, so imports will tend to go up,” said Swift.

Exporting chemicals and plastics from the US into much weaker economies in Europe and Asia is challenging enough. A strong US dollar compounds the impact.

US chemical industry exports surged 22% to $153.1bn in 2021 and were projected to rise another 13% to $173.5bn in 2022, according to the American Chemistry Council (ACC) in its mid-year outlook. Polyethylene (PE) is a key US export, with major destinations in Asia, Europe and Latin America.

The US also imported $128.3bn in chemicals in 2021 and this was expected to rise 20% to $153.6bn in 2022, according to the ACC.

PARADE OF EARNINGS WARNINGS
US-based Eastman Chemical in its 13 September earnings warning for Q3 specifically cited the stronger US dollar versus a number of currencies, including the euro and Japanese yen, as one of the many culprits.

Eastman in 2021 derived around 26% of sales from Europe, Middle East and Africa (EMEA), along with 24% from Asia.

More recently on 27 September, US-based plastics compounder Avient warned on lower-than-expected Q3 earnings based on eroding consumer sentiment and demand in Europe, the lack of recovery in Asia and weakening demand trends in the US from higher interest rates, along with global customer destocking.

Avient also highlighted foreign-exchange headwinds, which accounted for about a third of the downward earnings revision for Q3. About 25% of the company’s sales in 2021 came from Europe, along with 16% from Asia.

On 26 September, US-based titanium dioxide (TiO2) producer Tronox took down its Q3 earnings before interest, tax, depreciation and amortisation (EBITDA) guidance to $240m-255m from prior expectations of $275m-295m on weaker-than-expected volumes in Europe and Asia in particular, as well as increasing energy costs in Europe.

The EMEA region accounted for 39% of Tronox’s sales, with Asia accounting for 33% based on 2021 sales.

The Tronox warning follows that of US-based Chemours on 21 September which cited a continued deterioration in the demand outlook for TiO2, most notably in Europe and Asia. EMEA accounted for 22% of Chemours’ sales in 2021, with Asia making up 29%.

Heavier profit shortfalls for US-based companies are coming – or will come – from companies most exposed to Europe and Asia. While not all companies have cited foreign-exchange specifically in profit warnings, it is most certainly a factor and will only compound the weakness.

US-based Huntsman on 16 September slashed its Q3 earnings guidance on high energy costs in Europe, lower-than-expected demand, along with a lagging economy in China. Huntsman had 27% of sales from Europe, along with 30% from Asia based on 2021 figures.

Other US-based chemical companies with significant exposure to Europe and Asia include Trinseo and Celanese.

One of the least exposed to these regions is Westlake, where Europe accounted for just 7% of 2021 sales and Asia only 3%. However, Westlake has heavy exposure to the interest rate sensitive housing market – even more so after its $2.15bn acquisition of Boral’s North American building products business in October 2021.

US DOLLAR OUTLOOK AND IMPLICATIONS
As long as the US Federal Reserve continues to be more aggressive in hiking interest rates to tamp down inflation than other central banks, the US dollar will likely continue strengthening.

However, other major central banks are catching up. The European Central Bank (ECB) and the Bank of England are already stepping up rate hikes and signalling they will be more aggressive. Yet the Bank of Japan is holding rates at near zero while the People’s Bank of China continues to cut rates to stimulate its economy.

Paul Hodges, chairman of consultancy New Normal, highlighted the strong correlation between the weakness of the euro versus the dollar in terms of European real (inflation adjusted) yields. The lower real yield of euro sovereign debt versus US Treasurys has caused the euro to fall mightily.

“In turn, this is forcing the European Central Bank to follow the Fed in raising rates in response to inflation. And other second-order impacts are now underway,” said Hodges in New Normal’s monthly pH report.

Key Latin American currencies – the Brazilian real and Mexican peso in particular – have held up relatively well against the US dollar and thus the region will be less of a headwind on the foreign-exchange front.

Brazil’s central bank, after having already aggressively raised rates since March 2021 at 12 consecutive policy meetings, is now mulling an end to the rate hike cycle.

The huge move in the US dollar could cause further turmoil in financial markets, particularly in emerging markets where governments and companies have taken on US dollar-denominated debt, which must be repaid in dollars.

Morgan Stanley chief equity strategist Mike Wilson on 26 September noted that the surging US dollar is creating “an untenable situation for risk assets that historically has ended in a financial or economic crisis, or both”.

With a good chunk of sovereign and corporate debt, particularly in emerging markets, denominated in US dollars, the cost of servicing that debt in local currency will go up substantially, noted Swift at ICIS.

“It will be much harder for many to service that debt, and the strong dollar could lead to a debt crisis and geopolitical vulnerabilities in much of the emerging world,” said Swift.

Insight article by Joseph Chang

Thumbnail image shows dollars. Image by Shutterstock.