Epoxy
September 27, 2021
Future Forecast
Future US chem demand fueled by re-shoring, strained by supply
Author: Al Greenwood
2021/09/22
HOUSTON (ICIS)–The US chemical industry should continue growing in the next few years, with demand being fueled by manufacturing plants returning to the country, economist Kevin Swift said on Wednesday.
However, shortages in labour and raw materials could keep chemical demand from growing faster, since these are slowing down important end markets such as automobiles and housing, Swift said.
He spoke during a presentation at the Societe de Chimie Industrielle. Swift’s comments were among his first since retiring as the chief economist for the American Chemistry Council (ACC).
The supply constraints were the downside in what is otherwise an optimistic outlook for the economy.
The purchasing managers’ index (PMI) from the Institute for Supply Management (ISM) points to further growth, Swift said. Another leading indicator, which was developed by Swift, has slowed down, but it still indicates more growth.
Swift’s indicator generally takes about three months of decline for it to signal a turn in the business cycle. “It’s not signalling that yet,” he said.
The decline is showing the effects of the Delta variant of the coronavirus, which is slowing down the leisure, hospitality and travel sectors of the economy, he said. Manufacturing continues to perform fairly well.
The number of new homes that have started construction stand at about 1.5m units, the highest since the housing crisis from 2006-2008, Swift said.
That level of housing starts reflects the millennial generation entering their peak years for house buying, Swift said.
The number of houses that have received permits but have not started construction illustrates the shortages of building materials and labour, Swift said. Some homebuilders are finishing houses without refrigerators and appliances.
The housing market is a key consumer of plastics and chemicals, such as plastic pipe, insulation, paints and coatings, adhesives and synthetic fibres. The ACC estimates that each new home built represents $15,000 worth of chemicals and derivatives.
Automobiles, another important end market, are also contending with supply shortages, particularly for semiconductor chips.
Those shortages should cause US automobile sales to dip during the third quarter before rebounding to an annualised rate of 17m/year, Swift said. “That’s actually a very good level, and that supports a lot of chemistry.”
In addition, automobiles in the US are becoming larger, so that will increase the amount of plastic and other chemicals that each one will consume, he said. As electric vehicles (EVs) become more popular, that will increase demand for other types of chemicals.
One exception is catalysts, which automobile companies use in catalytic converters. Because EVs have no emissions, they do not need catalytic converters.
Swift expects every major chemical end market in the US will expand in 2021. He noted weakness in printing, which reflects fewer people reading physical copies of media.
In 2022, he expects weakness in apparel and textile-mill products, two other US industries that have been in long-term decline.
RESHORING
The disruptions to supply chains have accelerated a trend towards bringing manufacturing plants closer to demand centres, a phenomenon known as reshoring.
Companies began considering reshoring 10 years ago in the aftermath of the Fukushima earthquake in Japan.
The earthquake shut down plants that were the sole suppliers of critical electrical chemicals, Swift said. Fukushima was a wake-up call for companies to start developing more resilient supply chains.
The coronavirus pandemic proved to be a bigger shock to supply chains, and Swift expects more companies to reshore production to North America.
The trend should benefit demand for plastic additives and electronic chemicals.
CHEM INVENTORIES REMAIN LOW
Inventories of chemicals should remain low until 2022, Swift said.
US chemical producers have struggled to restock because of disruptions caused by the coronavirus, an active hurricane season in 2020, winter storm Uri and more hurricanes in 2021.
“We just can’t seem to win this year with the weather,” Swift said.
For the economy in general, Swift warned that it could take time for all the supply constraints to become resolved. “It might take two years in some cases.”
US CHEMS TO MAINTAIN COST ADVANTAGE
Swift expects the US chemical industry to maintain its cost advantage through at least 2024. During that time, Brent oil prices should remain at $60-80/bbl.
US chemical producers benefit from relatively high oil prices because they overwhelmingly rely on gas-based feedstock such as ethane. Meanwhile, much of the world relies on oil-based naphtha.
As a rule of thumb, the US chemical industry has a cost advantage when oil prices are at least 7 times higher than those for natural gas.
That ratio has remained above 7 even with the recent rally in US prices for natural gas, which broke $5/MMBtu for the first time in years.
CHEMICAL UTILISATION RATES TO RISE
Swift expects average utilisation rates for the chemical industry to rise in the upcoming years because companies have announced few new projects.
Chemical producers began announcing plans to build new US plants in the early 2010s in response to the advent of shale gas, Swift said. Those announcements peaked in 2014 and have since trailed off.
New plants take six to eight years to complete, he said. With that, the pace of new plant start-ups should slow in the second half of this decade.
If demand continues to rise, then utilisation rates should increase rise by quite a bit, Swift said.
High operating rates benefit chemical companies because it lowers their production costs for each tonne of product that they manufacture.
September 27, 2021
Future Forecast
Future US chem demand fueled by re-shoring, strained by supply
Author: Al Greenwood
2021/09/22
HOUSTON (ICIS)–The US chemical industry should continue growing in the next few years, with demand being fueled by manufacturing plants returning to the country, economist Kevin Swift said on Wednesday.
However, shortages in labour and raw materials could keep chemical demand from growing faster, since these are slowing down important end markets such as automobiles and housing, Swift said.
He spoke during a presentation at the Societe de Chimie Industrielle. Swift’s comments were among his first since retiring as the chief economist for the American Chemistry Council (ACC).
The supply constraints were the downside in what is otherwise an optimistic outlook for the economy.
The purchasing managers’ index (PMI) from the Institute for Supply Management (ISM) points to further growth, Swift said. Another leading indicator, which was developed by Swift, has slowed down, but it still indicates more growth.
Swift’s indicator generally takes about three months of decline for it to signal a turn in the business cycle. “It’s not signalling that yet,” he said.
The decline is showing the effects of the Delta variant of the coronavirus, which is slowing down the leisure, hospitality and travel sectors of the economy, he said. Manufacturing continues to perform fairly well.
The number of new homes that have started construction stand at about 1.5m units, the highest since the housing crisis from 2006-2008, Swift said.
That level of housing starts reflects the millennial generation entering their peak years for house buying, Swift said.
The number of houses that have received permits but have not started construction illustrates the shortages of building materials and labour, Swift said. Some homebuilders are finishing houses without refrigerators and appliances.
The housing market is a key consumer of plastics and chemicals, such as plastic pipe, insulation, paints and coatings, adhesives and synthetic fibres. The ACC estimates that each new home built represents $15,000 worth of chemicals and derivatives.
Automobiles, another important end market, are also contending with supply shortages, particularly for semiconductor chips.
Those shortages should cause US automobile sales to dip during the third quarter before rebounding to an annualised rate of 17m/year, Swift said. “That’s actually a very good level, and that supports a lot of chemistry.”
In addition, automobiles in the US are becoming larger, so that will increase the amount of plastic and other chemicals that each one will consume, he said. As electric vehicles (EVs) become more popular, that will increase demand for other types of chemicals.
One exception is catalysts, which automobile companies use in catalytic converters. Because EVs have no emissions, they do not need catalytic converters.
Swift expects every major chemical end market in the US will expand in 2021. He noted weakness in printing, which reflects fewer people reading physical copies of media.
In 2022, he expects weakness in apparel and textile-mill products, two other US industries that have been in long-term decline.
RESHORING
The disruptions to supply chains have accelerated a trend towards bringing manufacturing plants closer to demand centres, a phenomenon known as reshoring.
Companies began considering reshoring 10 years ago in the aftermath of the Fukushima earthquake in Japan.
The earthquake shut down plants that were the sole suppliers of critical electrical chemicals, Swift said. Fukushima was a wake-up call for companies to start developing more resilient supply chains.
The coronavirus pandemic proved to be a bigger shock to supply chains, and Swift expects more companies to reshore production to North America.
The trend should benefit demand for plastic additives and electronic chemicals.
CHEM INVENTORIES REMAIN LOW
Inventories of chemicals should remain low until 2022, Swift said.
US chemical producers have struggled to restock because of disruptions caused by the coronavirus, an active hurricane season in 2020, winter storm Uri and more hurricanes in 2021.
“We just can’t seem to win this year with the weather,” Swift said.
For the economy in general, Swift warned that it could take time for all the supply constraints to become resolved. “It might take two years in some cases.”
US CHEMS TO MAINTAIN COST ADVANTAGE
Swift expects the US chemical industry to maintain its cost advantage through at least 2024. During that time, Brent oil prices should remain at $60-80/bbl.
US chemical producers benefit from relatively high oil prices because they overwhelmingly rely on gas-based feedstock such as ethane. Meanwhile, much of the world relies on oil-based naphtha.
As a rule of thumb, the US chemical industry has a cost advantage when oil prices are at least 7 times higher than those for natural gas.
That ratio has remained above 7 even with the recent rally in US prices for natural gas, which broke $5/MMBtu for the first time in years.
CHEMICAL UTILISATION RATES TO RISE
Swift expects average utilisation rates for the chemical industry to rise in the upcoming years because companies have announced few new projects.
Chemical producers began announcing plans to build new US plants in the early 2010s in response to the advent of shale gas, Swift said. Those announcements peaked in 2014 and have since trailed off.
New plants take six to eight years to complete, he said. With that, the pace of new plant start-ups should slow in the second half of this decade.
If demand continues to rise, then utilisation rates should increase rise by quite a bit, Swift said.
High operating rates benefit chemical companies because it lowers their production costs for each tonne of product that they manufacture.
September 27, 2021
BASF in China
BASF sees Zhanjiang site generating up to €5B in annual sales
Sep. 27, 2021 8:08 AM ETBASF SE (BASFY)By: Carl Surran, SA News Editor
- BASF (OTCQX:BASFY) says it expects the Zhanjiang chemical complex under construction in southern China will deliver €4B-€5B ($4.69B-$5.86B) in annual sales by 2030.
- The company says the Zhanjiang project, which will cost €8B-€10B, likely will contribute €1B-€1.2B to EBITDA by 2030.
- BASF expects two-thirds of the world’s chemical production will take place in China by 2030, and that the Zhanjiang plant ultimately would become the company third-largest production site after its Ludwigshafen headquarters in Germany and a complex in Antwerp, Belgium.
September 27, 2021
BASF in China
BASF sees Zhanjiang site generating up to €5B in annual sales
Sep. 27, 2021 8:08 AM ETBASF SE (BASFY)By: Carl Surran, SA News Editor
- BASF (OTCQX:BASFY) says it expects the Zhanjiang chemical complex under construction in southern China will deliver €4B-€5B ($4.69B-$5.86B) in annual sales by 2030.
- The company says the Zhanjiang project, which will cost €8B-€10B, likely will contribute €1B-€1.2B to EBITDA by 2030.
- BASF expects two-thirds of the world’s chemical production will take place in China by 2030, and that the Zhanjiang plant ultimately would become the company third-largest production site after its Ludwigshafen headquarters in Germany and a complex in Antwerp, Belgium.
September 24, 2021
Interesting Speculation
What global petchems demand would have been like without the China property bubble warns us about the future
Australia, Business, China, Company Strategy, Economics, Europe, European economy, European petrochemicals, Fibre Intermediates, India, Indonesia, Japan, Malaysia, Methanol & Derivatives, Middle East, Olefins, Philippines, Polyolefins, Singapore, South Korea, Styrenics, Taiwan, Thailand, US By John Richardson on 24th September 2021 in Australia, Business, China, Company Strategy, Economics, Europe, European economy, European petrochemicals, Fibre Intermediates, India, Indonesia, Japan, Malaysia, Methanol & Derivatives, Middle East, Olefins, Philippines, Polyolefins, Singapore, South Korea, Styrenics, Taiwan, Thailand, US SHARE THIS STORY
By John Richardson
PLAYING “What if?” games by changing the course of history is popular amongst students of the subject, including myself.
Imagine, therefore, in our world of petrochemicals, if China hadn’t decided in late 2008 to launch the world’s biggest-ever economic stimulus package to compensate for the Global Financial Crisis.
Beijing felt it had no choice at the time because of a government estimate that some 20m citizens might return from the countryside to the cities after the Lunar New Year Holidays in 2009, only to find that their jobs in export-focused factories had disappeared.
China was in a rush to replace export-led growth with more local-for-local consumption, because of the collapse of overseas global demand resulting from the Global Financial Crisis
When things are rushed, there’s a higher chance they can go wrong. We ended up with factories being built almost solely for the economic multiplier effect from construction activity without sufficient regard for raw-material supply and how to sell the output. We saw this in purified terephthalic acid.
As for the real-estate bubble, James Kygne of the Financial Times – quoting Logan Wright, a Hong Kong-based director at the Rhodium Group – wrote that there were sufficient empty properties in China to house over 90m people.
There were five G7 countries – France, Germany, Italy, the UK and Canada – that could each fit their entire populations into the empty Chinese apartments with room to spare, he added.
This amounts to enough homes for more than 30m Chinese families as three people is the average size of a Chinese household.
This gargantuan oversupply is occurring as demand for real estate declines due to an ageing population. The number of new births registered in 2020 was just 10m, the lowest since the founding of the People’s Republic of China in 1949, wrote the Guardian.
China’s property developers appear to have ignored the demographic headwinds,
They had instead been driven by what Caixin magazine said were the “three carriages” – high turnover, high gross profit and high leverage. Developers used borrowed money to acquire land, collected presale cash before projects even started and then borrowed more to invest in further projects, according to the article.
Why global MDI and TDI demand could have been 8.6m tonnes lower
In keeping with “What if?”, let’s imagine that Beijing had taken an entirely different set of policy decisions in 2008, the same as what is happening today through President Xi Jinping’s pivot to “common prosperity”.
From 2009 onwards, income and wealth inequality would have been reduced. China would have raised the tax base to pay for what was even then a rapidly greying population.
Greater state revenues would have come from higher income taxes, more stringent regulations to make people pay their taxes and new property taxes – measures which are now being planned.
BANG, look at the chart on the left in the slide below – what the world of methylene diphenyl diisocyanate (MDI) and toluene diisocyanate (TDI) would have looked like without the 2009-2020 real estate frenzy. These are two of the raw materials needed to make polyurethanes (PU).
Growth would have still been solid, averaging 2% during most years, along with a few years of negative growth because of normal economic cycles.
Instead of China’s share of global demand rising from 21% in 2008 to an average of 30% in 2009-2020 – as actually happened – China’s percentage share of the total would have remained unchanged at 21%.
In the chart on the left, I have kept demand in the other regions unchanged from what actually took place. This would have left Europe as the world’s biggest market.
Cumulative global demand in 2008-2020 would have been 8.6m tonnes lower than was actually the case. Global demand would have risen by an average of 2% per year versus what really happened – a 4% increase.
The chart on the right shows the real course of events with, as I said, China’s global percentage share rising to an average of 30%. This pushed Europe into second place.
You might point out that global PU end-use demand is much more diverse than just rigid MDI-based foams for insulation and flexible TDI-base foams that go into sofas and mattresses etc. (see the chart below).
And it was not just people buying new homes in China who needed to insulate their houses and buy new sofas and mattresses.
But rising property wealth would have greatly supported sales of autos and luxury shoes, which are among the other end-use markets for PU.
How else does one fully explain the remarkable jump in China’s percentage share of global demand in 2009-2020 other than the property bubble, given that the headwinds of an ageing population grew stronger during this period?
All China’s long-term demand growth forecasts must be re-assessed
Global financial markets rallied following Evergrande’s pledge to meet $83.5m of interest payments on an overseas bond, which were due yesterday.
But Evergrande still has more than $300bn in obligations to creditors and 778 projects under way in 223 cities, with great uncertainty surrounding how the government would rescue Evergrande if it were to default on its debts.
I have been told by wise China hands that a rescue would involve big investors being left on the hook. The company would be converted into a state-owned enterprise with Evergrande’s land and property sold at discounts to small investors.
This would be entirely in keeping with Xi’s heavier emphasis on “common prosperity” at the expense of “get rich quick”.
But whatever happens with Evergrande, Beijing appears to have set a course for the long term – a greater focus on income equality and tax collection that could and maybe should have happened back in late 2008.
This means we need to redraw long-term forecasts for China’s petrochemicals demand growth. New forecasts must centre on three headline scenarios with lots of grey areas in between:
- “Back to the future”. China relaxes credit standards for real estate, leading to a re-inflation of the bubble. But how much longer could the bubble continue to inflate because of oversupply?
- Beijing sticks with “common prosperity”. It is a huge success.
- The government sticks with “common prosperity”. But its policies largely fail due to difficulties in expanding the tax base. The wealthy elite successfully resist attempts to reduce income and wealth inequalities.
Or you can just assume “back to the future” and not bother with Scenarios 2 and 3. But I see this an unacceptable risk for your employees and shareholders.
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