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CDI Economic Summary: US inflation heightens recession risk
NEW YORK (ICIS)–Inflation is Public Enemy No. 1, and the US Federal Reserve will pull out all the stops to decapitate the beast, heightening the risk of recession. Turmoil in the financial markets reflects such fears, as the Fed embarks on a series of aggressive interest rate hikes and the unwinding of its $9tr balance sheet. If there was any doubt on the Fed’s resolve, chair Jerome Powell quashed it as he opened the FOMC (Federal Open Market Committee) press conference on 4 May by addressing the American people directly. “Inflation is much too high, and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses,” said Powell. The US government is already releasing crude oil from the Strategic Petroleum Reserve (SPR), and even considering a lifting of tariffs on Chinese imports to tamp down inflation. A peak in US inflation is yet to be seen. The April Consumer Price Index (CPI) rose by another 0.3% from March and is up an eye watering 8.3% year on year. At least the monthly pace of gains moderated in April as March saw a 1.2% month-on-month gain. Globally, the Russia/Ukraine war is further exacerbating inflation with higher energy and commodity prices and logistics constraints while China’s COVID lockdowns add to such constraints while also severely straining its economy. ICIS projects US Consumer Price Index (CPI) inflation to peak in Q2 at 8.2% and ease to 6.4% by Q4 2022, and an average of 3.6% in 2023 as Fed rate hikes take effect. US RETAIL INVENTORIES PILE UP The massive pile-up in inventories at US big box retailers bodes well for goods inflation easing and is also a warning sign for chemicals demand, which has partly been propped up by overbooking of orders. Walmart’s Q1 inventories rose 8.3% from Q4 2021 and a stunning 32.0% year on year to $61.2bn. Target’s Q1 inventories were up 8.5% quarter on quarter and 43.1% year on year. Home Depot and Kohl’s also saw big jumps in inventories, along with ecommerce leader Amazon. Consumers are still spending, but on different things. US retail sales overall rose 0.9% in April from March and was up 8.2% year on year – not surprising given the level of inflation. But retailers were shocked by the magnitude of the spending shift away from discretionary and “bulkier” items such as home and kitchen appliances, TVs and outdoor furniture, as more of the household budget is taken up by food and fuel. Bloated inventories will lead to price markdowns in at least the next two quarters as retailers look to move excess stock. This destocking will be felt down the supply chain, all the way to chemicals and plastics. US HOUSING LEVITATES US housing continues to levitate at high levels, with April starts down just 0.2% from March to a seasonally adjusted annual rate (SAAR) of 1.72 million – up 3.1% year on year. But building permits fell 3.2% month on month. While demand for housing has been resilient, higher mortgage rates and rising home prices are expected to take a toll on demand later this year and next. ICIS projects housing starts to peak in 2022 at 1.72 million before falling to 1.60 million in 2023. Light vehicle sales improved 6.6% in April from March to a SAAR of 14.3 million units but was down 21.9% from a year ago on continuing semiconductor and other supply chain constraints. ICIS projects only a slight improvement to 15.2 million units in 2022 from 15.0 million in 2021. Overall, the risk of recession in the US is elevated amid high inflation, energy volatility, aggressive Fed tightening and knock-on impacts from the Russia/Ukraine war and China’s COVID lockdowns, with ICIS seeing a 37% chance in the next 12 months. One bright spot on the inflation front is the coming destocking in retail. Great if you’re in the market for some patio furniture but businesses may want to hit the deck. Additional contribution by Kevin Swift
US fertilizer producer LSB Industries launches green ammonia project
HOUSTON (ICIS)–US fertilizer producer LSB Industries announced that it has entered into agreements with thyssenkrupp Uhde USA and Bloom Energy to develop a project to produce approximately 30,000 tonnes of green ammonia per year at LSB’s Pryor, Oklahoma facility. The company said thyssenkrupp Uhde will develop the engineering design to convert a small portion of Pryor’s existing conventional ammonia capacity into green ammonia. Pending the results of the feasibility study currently underway, and subsequent board approval, the project will be constructed in two phases with the first part having Bloom supplying a 10 megawatt (MW) solid oxide electrolyzer. This will be followed by the installation of an additional 20MW alkaline electrolyzer unit, which will be sourced from a leading manufacturer. Bloom will own, operate and maintain the solid oxide electrolyzer that, once in operation, will be the largest of its kind in the world. Once the second electrolyzer is installed and operational, Pryor will be the largest green ammonia production site in North America. “We are very excited to partner with Bloom Energy and thyssenkrupp Uhde in taking our first step to becoming a leading supplier of zero carbon or green ammonia in a unique facility that will have two electrolyzer technologies operating side by side. We believe that being an early entrant into the green ammonia space will allow us to become a leading player as the market evolves,” said Mark Behrman, LSB president, and CEO. “This project is very important for LSB and our partners because, in addition to its initial environmental benefit, it provides a learning opportunity. With two electrolyzer technologies working together in a real-world application, we can learn how to effectively develop projects and operate facilities in this exciting new environment.” Behrman said the company views this project as their first critical step in becoming a major facilitator and participant in the green ammonia market. Green ammonia is produced by extracting hydrogen from water using an electrolyzer powered by a renewable energy source, such as solar or wind. Since no natural gas or other fossil fuels are used as the feedstock to the ammonia production process, nor as the power source, the end-product has no associated carbon emissions. LSB said the green hydrogen produced from the electrolyzers as part of the ammonia production process is expected to qualify for federal incentive programs such as the production and investment tax credits currently under evaluation by the US Congress.
PODCAST: European ACN players monitor softer downstream developments on ABS
LONDON (ICIS)–The European acrylonitrile (ACN) market has seen lower demand from different applications. In this latest podcast, ICIS Deputy Managing Editor Jane Massingham (Europe) talks to Markets Reporter Stephanie Wix about the downstream acrylonitrile-butadiene-styrene (ABS) market developments. ACN run rates in Europe lower due to softer demand Some respite sought from feedstock costs in June ABS imports more competitively priced but volumes still hampered by logistics Logistical pressures within Europe expected to continue to year-end ABS supply long, demand stable to soft, depending on application
Germany’s chemicals outlook worse for Q2 – VCI trade group
LONDON (ICIS)–German chemical producers’ trade group VCI keeps withholding a full-year 2022 outlook but one thing is clear: the current Q2 will be worse than Q1 – that is, things will get worse before they get better, economists said in a VCI webinar. Shortly after Russia began its attack on Ukraine on 24 February, VCI pulled its full-year 2022 outlook. That outlook was for production to rise 2% and sales to rise 5%. With the current "maximal uncertainty" and fears that Russian natural gas supplies may end any day, VCI will not reinstate a full-year outlook at this time, the group's chief economist, Henrik Meincke, said in VCI’s Q1 webinar on Tuesday. In the short-term, however, it is clear that with declining industrial production, underlying chemical output (chemicals excluding pharma) in Q2 will continue to fall from Q1 – when it already fell 1.1% quarter on quarter and 1.6% year on year, he said. Germany’s chemical production, Q1 2022: Change from Q4 2021 Change from Q1 2021 Inorganic basic chemicals 6.0% 2.2% Petrochemicals and derivatives -4.3% -1.3% Polymers -0.9% 6.1% Fine and specialty chemicals -2.0% -8.1% Detergents and soap 2.3% 0.8% Pharmaceuticals 6.4% 12.3% Chemicals excluding pharma -1.1% -1.6% (source: VCI) The ongoing raw material shortages and high prices, along with very high energy costs, keep squeezing chemical producer margins, he said. While chemical producers try to pass on the higher energy and material costs to customers, it is often not possible to pass on the full increase, he said. Also weighing on the industry are China’s strict coronavirus lockdowns, which affect global supply chains and slow that country’s economic performance. Nevertheless, Meincke expressed the hope that the expected decline from Q1 to Q2 will still be "in an acceptable range" – unless there is a sudden end to Russian gas deliveries. GAS THREAT SPEEDS UP STRUCTURAL CHANGE Axel Angermann, chief economist at investment firm FERI Trust GmbH, added that the biggest near-term challenge facing the industry was an embargo on Russian energy, in particular natural gas. The resulting spike in energy prices would “with certainty” trigger a recession, not only in Germany, but also in many other European countries, he said. Even before the war, Germany's energy-intensive sectors, such as chemicals, were undergoing structural changes and struggling to stay competitive, he said. A sudden Russian gas stop would mean that those changes are compressed into a single point in time, forcing customers to quickly turn to lower-cost suppliers in the US or elsewhere to buy chemicals. "The big worry" is that once customers have made that change, they will not return, even if gas supplies should resume later, he said. INDUSTRIAL POLICY As a potential positive, Meincke noted that the combined impacts from the Ukraine war, the coronavirus pandemic and the supply chain problems have underlined the importance of the chemical industry for Germany's economy. This, in turn, has created support for industrial policies that enable the investments needed for the transformation of the industry towards decarbonisation – a transformation that was planned before, but would now need to accelerate, he said. Please also visit ICIS Ukraine topic page Front page image: German flags outside the Reichstag building, seat of the German Parliament, in Berlin. Source: Shutterstock
PODCAST: Highlights of ReFocus Sustainability & Recycling Summit in Cincinnati, US
HOUSTON (ICIS)–Senior Editor for Recycled Plastics Emily Friedman and Senior Analyst for Recycled Plastics Paula Leardini discuss the latest developments at the 2022 ReFocus Sustainability & Recycling Summit in Cincinnati, Ohio, including: Changing the perception of plastics, and how sustainability and plastics go hand-in-hand. "We love plastics, we hate plastic waste," said Patrick Krieger, vice-president of sustainability at the Plastics Industry Association How recycled plastics fit with other transformative topics, such as diversity, equity and inclusion (DEI) and emissions reductions A preview of their Day 2 discussion on the North American chemical recycling industry, including capacities, feedstocks, end markets, pricing drivers and future challenges and opportunities.
PODCAST: Asia Pacific PE market roiled in early months of 2022 but growth outlook remains
SINGAPORE (ICIS)–The polyethylene (PE) market in Asia has had a volatile few months since the start of the year, with import prices in southeast Asia alone gaining sharply while also still struggling with sluggish demand. Not all is doom and gloom though with some bright sparks expected in certain sectors in coming months. SE Asia LLDPE import prices gain 15% Jan-March China lockdowns worsen Asian demand outlook China 2022 PE demand growth forecast at 5.8% y/y In this episode of the ICIS podcast, Senior Editor Izham Ahmad and ICIS Senior Analyst Shariene Goh examine the events of the last five months and what’s to be expected for the Asian PE market in coming months.
Borouge $2bn IPO set to be biggest ever listing on Abu Dhabi Exchange
SINGAPORE (ICIS)–UAE-based polyolefins major Borouge could raise about $2bn from its initial public offering (IPO), making it the largest-ever listing in Abu Dhabi and marking another step in the Emirate's plan to boost its non-oil investments to diversify its economy. The UAE-based petrochemicals firm on 23 May said that it has set the offer price for the IPO at Emirati Dirham (AED) 2.45, which would imply an equity evaluation of about $20bn for the firm. The company plans to list some 3bn shares on the ADX, representing 10% of its issued share capital, with trading to begin on 3 June this year. The IPO subscription period started on 23 May and runs until 28 May for retail investors. Borouge on 23 May said that it has secured seven cornerstone investors for its IPO. This includes Abu Dhabi-based investment firm International Holding Company (IHC), private investment company Multiply Group, conglomerate Alpha Dhabi Holding, Abu Dhabi state-holding firm ADQ, Abu Dhabi Pension Fund, UAE's sovereign wealth fund Emirates Investment Authority as well as India's Adani family. International Holding Company, Multiply Group, and Alpha Dhabi Holding have committed to subscribe for shares in the offering in amounts equal to $50m; $50m; and $100m, respectively. Furthermore, ADQ has committed $120m; Abu Dhabi Pension Fund has committed $100m; Emirates Investment Authority has committed $75m; and the Adani Family has committed $75m towards the offering. Borouge is a joint venture between UAE’s state-owned energy major ADNOC and Austria's Borealis. Post-IPO, ADNOC will have a 54% stake in Borouge, while Borealis' stake will be 36%. Abu Dhabi is one of the seven emirates of the UAE and serves as its capital. Its production capacity currently stands at around 2.7m tonnes/year of polyethylene (PE) and 2.2m tonnes/year of polypropylene (PP), according to the company. Development of the company’s phase four project at the Ruwais complex is underway following the completion of its fifth PP unit at the site in the first quarter of this year. The company's $6.2bn Borouge 4 project is expected to be completed in 2025 and will boost its polymers capacity in Ruwais to 6.4m tonnes/year. ADNOC on 24 May signed an agreement with BP to take a 25% stake in the design stage of the blue hydrogen project, H2Teesside, marking its first investment in the UK. Separately, BP will also join ADNOC to evaluate a new blue hydrogen project in Abu Dhabi, conducting a joint feasibility study for a world-scale, low-carbon hydrogen project in the country. ADNOC and India’s Reliance Industries Ltd (RIL) earlier last year signed an agreement to build a greenfield petrochemicals facility to produce chlor-alkali, ethylene dichloride and polyvinyl chloride (PVC) in the UAE. Borouge's expansions will help Abu Dhabi's plan to achieve 64% contribution to GDP by the non-oil sectors, including petrochemicals, by 2030 from around 50% currently. With its large reserves of natural gas and associated liquids, Abu Dhabi is well-positioned to increase its participation in the petrochemicals sector, the Abu Dhabi government said in a report released in April last year." "As in the case of the Abu Dhabi’s refining expansion, the growth of the Emirate’s petrochemical industry represents another way in which Abu Dhabi can capture a larger share of the hydrocarbon value chain," it said. "Such expansion will also assist the Emirate in developing the necessary inputs for expanded domestic industries utilising basic plastics and industrial chemicals, thus contributing to the overall objective of economic diversification." Focus article by Nurluqman Suratman Thumbnail picture: Borouge's operations in Ruwais, Abu Dhabi (Source: Borouge)
BLOG: Europe PP: Supply chain demand destruction and the need for a new business model
SINGAPORE (ICIS)–Click here to see the latest blog post on Asian Chemical Connections by John Richardson. In the old familiar world, supply chains just worked. We didn’t have to worry about them. But some of today's problems with supply chains have been building for years, which have been greatly exacerbated, of course, by the pandemic and the Ukraine-Russia conflict. In European polypropylene (PP), as we discuss today, demand destruction is being caused by energy and semiconductor shortages etc. There is no immediate end in sight to the disruptions, creating the risk that European PP demand growth is negative this year, as was the case in 2020 at the height of the pandemic. We see it as unlikely that global supply chains will ever return to their "old normal" because of the big geopolitical re-alignments. These re-alignments – along with growing sustainability pressures – are why energy, petrochemicals and manufacturing are becoming much more localised. It this localised model which offers a strong long-term future for European petrochemicals, if the industry focuses increasingly on carbon abatement and plastics recycling. Editor’s note: This blog post is an opinion piece. The views expressed are those of the author, and do not necessarily represent those of ICIS.
PODCAST: Weak demand from lubricants, China’s Group II base oil import margins to be negative
SINGAPORE (ICIS)–ICIS analyst Jady Ma and Whitney Shi discuss the recent developments and outlook of China's base oil market. Heavy import losses of Group II base oils Sluggish downstream demand from lubricant companies Rising base oils exports to be a trend
Singapore revises Q1 GDP higher to 3.7%, 2022 growth forecast unchanged at 3-5%
SINGAPORE (ICIS)–Singapore's economy expanded by 3.7% year on year in the first quarter of this year, up from a preliminary estimate of 3.4%, while full-year growth forecast was kept unchanged at 3.0-5.0%, official data showed on Wednesday. On a quarter-on-quarter seasonally-adjusted basis, the economy expanded by 0.7% in the first quarter, slower than the 2.3% growth in the fourth quarter of 2021, the Ministry of Trade and Industry (MTI) said in a statement. The manufacturing sector expanded by 7.1% year on year in the first quarter, higher than the initial estimate of 6.0% and extending the 15.5% growth recorded in the previous quarter. The construction sector grew by 2.1% year on year in the first quarter, up from the previous projection of a 1.8% growth, but eased from the 2.9% growth in the previous quarter, as both public and private sector construction activities picked up during the quarter. The MTI kept its forecast for the full year at 3.0-5.0% but warned that "growth is now more likely to come in at the lower half of the forecast range". "MTI’s assessment is that the external demand outlook for the Singapore economy has weakened compared to three months ago," the ministry said. "In particular, the conflict has disrupted the global supply of energy, food and other commodities, which has in turn exacerbated global inflationary pressures and adversely affected the growth of many economies," it said of the effects of the ongoing Russia-Ukraine conflict. Meanwhile, stringent measures implemented in China to contain its domestic COVID-19 outbreaks are likely to weigh on its economy and contribute to global supply bottlenecks, the MTI said. The growth outlook for some outward-oriented sectors in the Singapore economy has weakened this year, the MTI said. "For instance, as China is a key market for petroleum and chemicals products from Singapore, its economic slowdown is likely to adversely affect the growth prospects of Singapore’s chemicals cluster and the fuel & chemicals segment of the wholesale trade sector," it added.
ICIS leading business barometer falls for second month in May
HOUSTON (ICIS)–The ICIS leading business barometer (LBB) fell for the second consecutive month in May, getting closer to indicating a recession. The barometer reached 131.4 in May, down from 132.5 in April and 133.0 in March. A recession call would occur if the barometer fell for three consecutive months and if its cumulative decline reached 3%. So far, the barometer has fallen for two consecutive months and the May figure is down by 1.2% from March. Year on year, the May LBB rose by 2.5%, a much slower rate than in previous months. Uncertainty in stock markets caused the decline. That uncertainty reflected monetary policy at the Federal Reserve and geopolitical events. "In summary, the latest reading indicates that business activity will appreciably slow," said Kevin Swift, ICIS senior economist. Issues facing companies including lingering supply-chain bottlenecks, capacity constraints in several industries and widespread labour shortages, he said. "Uncertainty about the future is very high due to tightening Federal Reserve policy, the war in Ukraine and the surge in energy costs." The share of expanding indicators, called diffusion, fell to 53% from 65% in May. Among the indicators rising were production-related ones for materials and other industries sensitive to cyclical fluctuations. Trends appear to be positive for construction-related materials, materials used in other durable goods, and materials used in packaging and for consumer and institutional applications. Performance chemistry for industry rose. Inventory and other broader leading economic measures increased. Selling prices as well as costs for raw materials and other inputs increased. Equity prices were mixed. The ICIS LBB is derived from 17 indicators relating to the production of materials and other industries sensitive to cyclical fluctuations; raw material and input prices; selling prices; hours worked; relative equity prices; industry sales-to-inventories; and several broader economic leading economic measures. Monthly data on the ICIS leading business barometer are available back to January 1947. The ICIS leading business barometer leads at US business cycle peaks by seven months on average and four months at business cycle troughs. The following chart shows the LBB.
INTERVIEW: High energy prices to boost sustainability megatrend – Covestro CFO
NEW YORK (ICIS)–Germany-based Covestro sees higher oil and gas prices driving not only the energy transition to electric vehicles (EVs) and renewable power but also greater use of insulation to enhance energy efficiency, making it well positioned to capitalise on these trends, its chief financial officer (CFO) said. “Energy prices going up in the mid-to-long term is a positive for us as energy efficiency programmes become more important. MDI [methylene diphenyl diisocyanate] is the best insulation used in refrigerators and buildings, and EVs use 3-5 times more polycarbonate (PC) versus traditional cars,” said Covestro CFO Thomas Toepfer in an interview with ICIS in New York. Covestro also produces polyurethane coatings and composites for wind turbine blades to make them lower cost and more durable, he noted. “If we can increase the lifetime of an offshore wind turbine by 2-3 years, there is a huge difference in investment returns,” said Toepfer. PC is used in EV battery packaging systems for thermal management as well as electric powertrain parts and other light-weighting applications. “The move to renewable energy, EVs and energy efficiency is helpful because we provide the products that enable this transition. It is a growth multiplier for our business,” said Toepfer. ENERGY IMPACT AND DEMANDCovestro, like all chemicals producers in Europe, is experiencing higher energy and raw materials costs, especially after Russia’s invasion of Ukraine. However, in Q1 it was able to pass on over 90% of these costs to customers on strong demand, and it sees demand momentum carrying into Q2, he pointed out. Potential EU sanctions on oil imports from Russia would have minimal impact on the company as it buys key raw materials such as toluene and benzene on world markets, he said. “On the Russian gas question, it is much less on the agenda politically but if this is curtailed in Germany the entire industry would be affected, including Covestro. German policy does not support this because the economic impact would be very negative,” said Toepfer. For 2022, Covestro expects energy costs to jump to €1.5bn-2bn from €1.0bn in 2021 but the CFO sees this as manageable amid solid demand growth. “In Q1 over 90% of these costs were passed on. As long as there is demand strength, and that’s what we see, there will be a flow-through,” said Toepfer. Aside from China, which has been hampered by COVID lockdowns, demand growth is generally strong in Europe and North America as well as the rest of Asia, he noted. Covestro in early May took down its 2022 guidance for earnings before interest, tax, depreciation and amortisation (EBITDA) by €500m to €2.0bn-2.5bn, on the China lockdowns, higher energy and raw materials costs and lower global economic growth projections. “About 50% of this was due to the China effect, and the other half linked to lower GDP projections. But as of the beginning of Q2, we’re not seeing margins going down so the momentum is continuing,” said Toepfer. AUTOMOTIVE OUTLOOKHowever, pockets of demand weakness include automotive, which continues to be constrained by the semiconductor shortage, as well as the furniture market in North America, which was one area cited by US big-box retailers in contributing to massive inventory build-ups in Q1. Automotive weakness is more supply driven, and could set the stage for a stronger 2023 and 2024, he said. “If you want to buy a new car in Germany, the waiting time can be one year. In the US it can be several months, and they are charging above list price which is pretty extraordinary. So the growth rate [this year] will be lower than initially expected but pent-up demand is building up, so 2023 and 2024 could be strong years,” said Toepfer. Thus far, it is “difficult to tell” when auto supply-chain issues will ease, as many expected this in 2022 and it is not happening so far, he added. On overall logistics and supply-chain constraints, Covestro is far less impacted than many other chemicals companies as it primarily produces for local markets, the executive said. “We are producing in regions for the regions, not depending much on ocean freight, so our local-for-local strategy is potentially much more successful during these times,” said Toepfer. Interview article by Joseph Chang
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