January 7, 2015 Yale Club. Dr. Kevin Swift. Managing Director and Chief Economist American Chemistry Council.

Transcription

1 January 7, 2015 Yale Club Dr. Kevin Swift Managing Director and Chief Economist American Chemistry Council

2 Chemical Marketing & Economics 7 January 2015 Economic & Chemical Industry Outlook for 2015 and Beyond Dr. T.K. Swift Chief Economist & Managing Director

3 Indicators of US Economic Progress Continue to Improve Indexed where December 2007 = Real Personal Income less Transfer Payments Real Business Sales Industrial Production Non-Farm Payrolls Sources: Federal Reserve, Bureau of Economic Analysis, and the Bureau of Labor Statistics

4 but Let s Adjust for Population Growth Indexed where December 2007 =100 and Adjusted for Population Gains Real Personal Income less Transfer Payments 100 Real Business Sales Industrial Production Non-Farm Payrolls Sources: Federal Reserve, Bureau of Economic Analysis, and the Bureau of Labor Statistics

5 Notes on the Chemicals Activity Barometer (CAB) What is it? The Chemicals Activity Barometer (CAB) is a composite index of economic indicators that are based on data (and signals) from the chemical industry. Why is it important? Due its early position in the supply chain, chemical industry activity leads that in the overall economy. What is it used for? The CAB can be used to anticipate potential turning points in the overall economy. The media and analysts will find this helpful.

6 Recent Trends in the CAB Dec-13 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 CAB (3 MMA) % Change M/M % Change Y/Y CAB % Change M/M % Change Y/Y Components: Production ~ ~ Equities ~ Prices ~ Other

7 Chemical Activity Barometer vs. Industrial Production Index Index where 2007=100 (3MMA) % Change Year-over-Year (3MMA Recession Industrial Production Chemical Activity Barometer Recession Industrial Production Chemical Activity Barometer

8 US Industrial Outlook Industry accounts for 85% of basic & specialty chemical sales Activity slowed in 2013 (to a 2.9% gain from 3.8% in 2012) With growth at 4.0% in 2014; 3.5% in 2015; and 3.6% in 2016 Building and construction related industries do well As do capital goods-related (especially energy) industries Food and non-durable consumer goods offer slower prospects Industrial output outstrips services for 7 th consecutive year in 2016 (re-shoring narrative) Production Index (2007=100)

9 US Light Vehicle Outlook Light vehicles represent an important market for chemistry (over $3,480 in chemistry per vehicle) A chill in winter sales but sharp rebound with 2015 sales of 16.5 million units US light vehicle sales are expected to rise in 2015 because of Pent-up demand Improving employment (and income) prospects Better availability of credit Lower gasoline prices Averaging 16.8 million during 2015 and 2016 Millions of Units (SAAR)

10 US Housing Outlook Housing is another large consumer of chemistry (over $15,000 in chemistry per start) Negatives include Sluggish household formations Demographics headwinds Shifting preferences Weak finances among potential first-time homebuyers Positives include Inventories are low Interest rates are low Better credit conditions Job growth will eventually lead to household formation A gain in housing starts to 1.22 million units this year and 1.37 million next (Keyword: Slog) Thousands of Units (SAAR) 2,500 2,000 1,500 1,

11 Surging US Oil & Gas Production? Million Barrels per Day (BPD) Billion Cubic Feet (BCF) per Day Crude Oil Production (left) Source: EIA and ACC analysis Natural Gas Production (right)

12 US Economy Gaining Momentum With a strong dollar and low energy prices, a virtuous cycle is in play In light of lower energy prices (and improved confidence and discretionary income), robust job gains, rising incomes, easing credit standards and higher household net worth, consumers will cautiously boost spending Housing will slowly rise as supply catches up with demand With still strong earnings expectations, capital spending will accelerate in response to global market growth, replacement and competitiveness needs, technological advances But lower energy prices put the oil and gas boom on hold for now Strong dollar fostering low interest rates but eventually the will rise as monetary accommodation is withdrawn

13 but World Still a Scary Place: Status of Global Economic Cycle Mid Late Recession Early Growth is peaking Credit growth strong Profit growth peaks Policy neutral Inventories / sales grow Growth moderating Credit tightening Earnings pressured Policy contracting Inventories expand while sales growth falls Falling activity Credit dries up Profits decline Policy eases Inventories and sales fall Activity (sales, IP, jobs and incomes) rebound Credit begins to grow Profits grow rapidly Policy is stimulative Inventories low; sales improve USA UK China India Euro Area Russia Japan Brazil

14 US Regional Chemical Production is Strengthening 3MMA % Change Y/Y Q 13 4Q 13 1Q 14 2Q 14 3Q 14 4Q 14

15 Basic Chemical Production Trends Severe downturn during recession and anemic recovery Export-led recovery as Europe entered secondary recession and emerging markets softened But growth re-engages to a 3.8% gain in 2015 Strongest gains in bulk petrochemicals & organics Followed by plastic resins and then synthetic rubber Gains strengthen after 2016 as new capacity comes on-stream 60 Production Index (2007=100)

16 : US Energy Prices Generally Falling in Either Absolute / Relative Terms $120 $100 WTI now at a discount to Brent $9 $8 $7 $80 $6 $60 $5 $4 $40 $3 $20 $2 $1 $0 Brent Oil ($bbl) WTI Oil ($bbl) $0 Natural Gas - Henry Hub ($/000 CF) Source: EIA

17 Leads to Falling US Feedstock Costs $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Western European Naphtha ($/metric ton) Source: Chemical Week $1.00 $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 US Ethane ($/gallon)

18 and Lower US Manufacturing Costs: Case of High Density Polyethylene (HDPE) $ per Metric Ton US Gulf Coast (2005) US Gulf Coast (2014) Northwest Europe (2005) Northwest Europe (2014) Middle East (2005) Middle East (2014) Northeast Asia (2005) Northeast Asia (2014) Raw Materials Utilities Direct Costs Other Costs

19 and Lower US Manufacturing Costs: Case of High Density Polyethylene (HDPE) $ per Metric Ton US Gulf Coast (2005) US Gulf Coast (2014) Northwest Europe (2005) Northwest Europe (2014) Middle East (2005) Middle East (2014) Northeast Asia (2005) Northeast Asia (2014) Raw Materials Utilities Direct Costs Other Costs

20 Oil-to-Gas Ratio: A Proxy for US Energy Competitiveness Divide Brent oil price ($ per barrel) by Henry Hub natural gas price ($ per 1,000 cubic feet). When the ratio is above 7, US competitiveness vis-à-vis other major producing regions is enhanced. The current ratio is very favorable for US competitiveness and exports of petrochemicals, plastics and other derivatives Source: EIA, ICE, NYMEX

21 US Industry Benefitting from the Energy Revolution Revolution in unconventional gas is supporting the rebirth of US petrochemical and fertilizer production as well as steel, tires, and plastic products North American ethylene producers have shifted to natural gas (ethane) from oil (naphtha) and dramatically reduced costs North America s chemical sector is second lowest-cost ethylene producer after the Middle East with a 40%+ cost advantage over Western Europe and Asia With Middle Eastern producers using blends of heavier liquids, the United States will be even more competitive Limited ethane supplies in the Middle East suggest that new projects starting-up at the end of the decade will crack naphtha (and have little cost advantage) Low natural gas prices encouraging large chemical multinationals to move operations to the United States The Wave of new investment 61% of which is FDI

22 Announced Chemical Industry Investments $ Billion Number of Projects $ $ $ $175 $ $ $ $75 40 $50 $25 20 $0 0 Dec-10Jun-11Dec-11Jun-12Dec-12Jun-13Dec-13Jun-14Dec-14 Total Investment Number of Announced Projects Source: ACC analysis

23 US Chemical Industry Capital Investment: Incremental Due to Shale Gas Billions of 2013 Dollars $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 This is in addition to the $30 billion per year that the industry normally invests More projects to be announced Potentially >$150 billion total investment spread over 12+ years Peak year for investment outlays Source: ACC analysis

24 In All Scenarios, the US Captures Market Share Away From Western Europe Basic Chemicals - Volume Index of Production (2007=100) United States Western Europe Sources: Eurostat, Federal Reserve, ACC analysis

25 4 th Quarter 2014 Status of US Specialty Chemicals Adhesives & Sealants Antioxidants Biocides Catalysts Coatings Construction Chemicals Corrosion Inhibitors Cosmetic Chemicals Dyes Electronic Chemicals Flame Retardants Flavors & Fragrances Food Additives Foundry Chemicals I&I Cleaners Lubricant Additives Mining Chemicals Oilfield Chemicals Paint Additives Paper Additives Pigments Plastic Additives Plasticizers Plastic Compounding Printing Ink Rubber Processing Textile Specialties Water Management Chemicals TOTAL Sources: ACC analysis % Change Year-over-Year

26 US Specialty Chemical Outlook Performance chemistry used mainly in other manufacturing Strong recovery averaging 6.0% per year since recession Activity strengthened and broadened in 2013 (and 8.9% gain) to a new record Growth expectations of a 3.8% gain in 2014; 4.6% in 2015; and 4.5% in 2016 Segments selling into light vehicles and other industry doing well Virtually all functional and market segments expand Aided by re-shoring/shale gas Production Index (2007=100)

27 Average % Growth ( ) Manufacturing Renaissance Aids the Specialty Chemical Outlook 15% 13% 11% 9% 7% 5% 3% 1% -1% -3% Cosmetic Additives I&I Catalysts Cleaners Textile Specialties Food Additives Printing Ink Foundry Chemicals Lubricant Additives Rubber Processing Chemicals Pigments Dyes Biocides Paint Additives Construction Chemicals Water Management Chemicals Adhesives & Sealants Plastic Additives Oilfield Chemicals Plasticizers Coatings Plastic Compounding Electronic Chemicals Note: Several functional- and market-oriented specialty chemical segments are hidden -5% -5% -3% -1% 1% 3% 5% 7% 9% 11% 13% 15% Average % Growth ( )

28 Average % Growth ( ) but at a Moderated Pace from Recovery 15% 13% 11% 9% 7% 5% 3% 1% -1% -3% Cosmetic Additives I&I Catalysts Cleaners Textile Specialties Food Additives Printing Ink Foundry Chemicals Lubricant Additives Rubber Processing Chemicals Pigments Dyes Biocides Paint Additives Construction Chemicals Water Management Chemicals Adhesives & Sealants Plastic Additives Oilfield Chemicals Plasticizers Coatings Plastic Compounding Electronic Chemicals Note: Several functional- and market-oriented specialty chemical segments are hidden -5% -5% -3% -1% 1% 3% 5% 7% 9% 11% 13% 15% Average % Growth ( )

29 Concluding Thoughts Shale gas has improved the competitiveness of the US manufacturing, especially chemicals Over 215 major chemical industry projects (valued at $137 billion) have been announced (perhaps over 250 and $160 billion when it s all said and done) Will generate new business, jobs, and tax revenues With renewed competitiveness and new supply, US exports gain as share of output with reaccelerating growth and US capturing global market share And tipping point in downstream customer industries points to strong domestic demand, which aids specialties (the next wave?) which will also be aided by competitiveness in raw materials In addition to shale gas and manufacturing renaissance, new materials (e.g., nanotechnology) and processes (e.g., bio-based chemistry) will also lead to enhanced growth In summary, a promising long-term future!

30 Questions? Telephone:

31 February 5, 2015 Penn Club Sam Samdani, PhD Senior Knowledge Expert McKinsey & Company

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