The Urethane Blog

Future Forecast

Future US chem demand fueled by re-shoring, strained by supply

Author: Al Greenwood


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.

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.

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.”

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.

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.