‘Trump effect’ lifts US chemicals

US chemical equity prices are getting a lift from optimism on a major fiscal spending/infrastructure boost in a Trump 
administration, while concerns over Trump’s policies on global trade have largely been set aside for now.

US President-elect Trump has proposed a direct $550bn infrastructure spending plan in the US, along with tax credit that is meant to spur another $1 trillion in private investment.

And on energy, it is all about deregulation – lifting restrictions on US energy development. Trump’s energy plan includes streamlining the permitting process, which would apply to energy, and potentially chemicals. This could spur yet another energy revolution in the US that could benefit the chemical sector and get more projects going.

“If Trump carries out his policies, it will be a net positive to our industry. Fiscal stimulus is positive for the construction sector, and less regulations for oil and gas can potentially increase feedstocks for us,” said Albert Chao, president and CEO of US-based polyethylene (PE) and polyvinyl chloride (PVC) producer Westlake Chemical. PVC is a key polymer in the housing and construction sector, mainly used to make pipes.

Chao spoke as part of an audience discussion at the Young & Partners Senior Chemical Executive Conference in New York on 29 November.

“In addition, a lower corporate tax rate will mean more cash for companies, and a lower personal tax rate will be positive for the stock market,” he added. Chemical equity prices have surged post-election, along with other industrial/infrastructure-related plays.

GLOBAL TRADE RISK

However, global trade is an area that could face downside risk. For the US chemical industry, which enjoyed a global trade surplus of $33.4bn (excluding pharmaceuticals) in 2015, this is particularly relevant.

About 40% of that trade surplus, or $15.3bn, came from Mexico, to which the US sent $20.1bn in chemicals in 2015.

US President-elect Donald Trump has promised to renegotiate the terms of the North American Free Trade Agreement (NAFTA) between the US, Mexico and Canada, and threatened to withdraw from the free trade agreement.

Yet the value chains between the US, Mexico and Canada are highly intertwined, noted Jose Luis Uriegas, CEO of Mexico-based Grupo Idesa, at the Latin American Petrochemical Association (APLA) annual meeting in November.

Uriegas noted that of every $1 of exports from Mexico to the US, 40 cents is comprised of US materials whereas for every $1 of exports from China to the US, US materials represent only 4 cents.

“The US is a large exporter of products to Mexico and they add a lot of value to exports from Mexico to the US and other regions,” said Uriegas.

Mexico uses US chemicals, not just for its own consumption, but also to manufacture products such as autos and appliances, to export to the US and other countries.

Any tariff placed on Mexican imports into the US would have both a direct and indirect negative impact on US chemicals. And the same for any retaliatory measures Mexico puts on US imports to Mexico.

Uriegas expressed optimism that NAFTA can be renegotiated in a way that is “healthy” for all countries involved.

From Mexico’s standpoint and on the chemical front, retaliatory tariffs would be less likely for some products and more likely and beneficial for others.

“I do not think there is any chance the Mexican government would put tariffs on chemicals [where none or little is made in Mexico, such as vinyl chloride monomer (VCM)] since it would only make the Mexican industry less competitive,” said Antonio Carrillo Rule, CEO of Mexichem, a major PVC producer, in a discussion with ICIS.

However, for chemicals or polymers that are made both in the US and Mexico, if the US places a tariff on imports, the Mexican government would likely retaliate, he said.

“Since there is less competition in general in Mexico than in the US, that would be good for the Mexican industry. For example, if there is a tariff placed on PVC or polyethylene (PE), then Mexichem and Braskem Idesa can raise prices [locally],” said Carrillo.

However, he said that “in the long run, my belief is that tariffs make companies complacent”.

In the meantime, Mexico’s economy is already taking a hit from the uncertainty being caused by an impending Trump presidency in the US.

“On the investment side in Mexico you are already seeing it. Carrier [the air conditioner manufacturer] stopped their plans to move to Mexico. And a hotel company announced delaying building new hotels,” said Carrillo.

However, it is unlikely the US would engage in a trade war with every part of the world, Westlake’s Chao said, allowing for an outlet for US chemical and polymer exports that would eventually find their way to where the demand is.

“There’s a lot of negotiating to do, but Trump’s a good negotiator. He may go after some low hanging fruit [when it comes to trade], and will definitely look at tax reduction,” said Chao.

“Corporate tax reform and regulatory reform would be positive but there are some concerns related to trade, as the US chemical industry is the largest exporting sector in the US economy,” according to Kevin Swift, chief economist at the American Chemistry Council.

“There’s also a lot of chemistry associated with infrastructure spending and that would be positive as well. Yet at this point, no one knows how things will play out,” he added. The US chemical industry is also unique in that unlike many other industrial sectors, much of its business is intra-company trade – a company sending product from one region to another between its divisions, Swift noted.

About 72% of US chemical imports are from related parties (or intra-company trade) and 42% of US chemical exports are to related parties, he added.

US CAPACITY FOR EXPORT

Global trade takes on a greater importance for the US chemical sector given all the new chemical capacity being built in the US, much of which is targeted for export.

There are eight ethane crackers under construction in the US – six of them worldscale and most of the downstream product being PE. Plus there are another four expansions of existing crackers and one restart of an idled cracker taking place.

In all, the new crackers and expansions are meant to bring on an additional 10.3m tonnes/year of ethylene, or 36% of the existing capacity base in the US by 2018, according to statistics compiled by ICIS. It will be important to have clear trade policies and open avenues for export product as the 1st wave of these plants come on line.

Regarding the new US crackers, about 55% of the downstream polymers could be exported, noted the ACC’s Swift.

Yet some aspects of Trump’s policies may help spur the second wave of US cracker construction being planned, particularly the lifting of Environmental Protection Agency (EPA) restrictions on energy development and production, and streamlining the permitting process, along a proposed reduction in corporate taxes from 35% today to 15% sometime in the future.

“In that second wave, you have many foreign companies continuing to seek investments in the US. With a new tax policy, that probably looks even better,” said Chao.

OIL PRICES, CAPEX DECLINES

The first and second wave of US crackers may also get a tailwind from rising crude oil prices as chemical prices tend to follow crude, while the US chemical sector uses cheaper natural gas liquids (NGL) as feedstock.

The OPEC deal announced on 30 November to cut production by 1.2m bbl/day boosted oil prices, with additional follow-through on 1 December with Brent hitting a 16-month high of about $54/bbl.

Oil prices could have been poised to rise in the mid to long term anyway, as major producers have severely cut back on capital spending (CAPEX) in the past two years.

On top of major cuts in 2015, CAPEX has fallen even further through Q3 2016 on an annualised run-rate basis versus reduced 2015 levels.

For example, US-based ExxonMobil’s annualised CAPEX through Q3 2016 is down 37% versus 2015 levels, which were down 19.2% from 2014.

Brazil-based Petrobras annualised CAPEX through Q3 2016 is down 28.1% from 2015 levels, which were down 38.1% from 2014.

For China’s Sinopec, which has major refining and chemical operations in addition to upstream oil and gas, annualised CAPEX through Q3 2016 is down 70.3% versus 2015 levels, which were down 27.4% from 2014.

In the oil and gas, which 
ExxonMobil CEO Rex Tillerson calls “a depletion business”, these cuts will eventually have a clear impact. The point of rebalance may be well on its way of being reached. ■

Picture credit: Rex Features