Light vehicles represent an important market for chemicals (nearly $3,000 per vehicle), and production has experienced temporary disruptions from the disaster in Japan. US light vehicle sales should rise to 13.5 million units in 2012 as pent-up demand fosters growth. Sales will improve even further during 2013, exceeding 14.5 million units then.
However, housing, the other large consumer of chemicals (over $15,000 per start), faces ongoing challenges. New homebuilding remains depressed as foreclosures continue to flood inventories. Only a minor gain in housing starts should occur in 2012 and the recovery in this sector will be quite slow. Housing activity should begin to stir in 2013. It remains well below the previous peak of 2.07 million units in 2005 and below the long-term underlying demand of 1.5 million units per year as suggested by demographics and replacement needs. Unfortunately, today's massive housing inventory will delay a full recovery until later this decade.
The softening of the manufacturing recovery should dampen chemical demand. Inventories can mean the difference between a slowdown and a recession; in general, lean inventories along the supply chain support future production gains. U. S. chemical inventories are relatively balanced and, barring a major recession, a large correction isn't expected. Production of chemicals, excluding pharmaceuticals, has eased as demand from key end-use markets has slowed and capacity utilization remains relatively stagnant (see Economic Snapshot, p. tk). Chemical exports continue to grow — driven by overseas growth, a weaker dollar and a favorable oil-to-gas price ratio.
The consensus is that US chemical output should improve slightly during 2012. Volumes for chemicals, excluding pharmaceuticals, which rose 6.1% in 2010 and should show a 3.5% gain in 2011, likely will grow only 2.5% in 2012 but then recover to 3.0% in 2013. Robust growth is expected in synthetic rubber and later in petrochemicals, organic derivatives and plastic resins as export markets revive. Demand from end-use markets will drive production of specialty chemicals. Strong gains are expected in agricultural chemicals and consumer products. In the long term, chemicals growth should expand at a pace exceeding that of the overall US economy (Figure 1).
THE IMPACT OF LOW-COST GAS
American chemical makers likely will strongly increase capital spending during the next several years. The need to add capacity and improve operating efficiencies will play a role. However, plants for petrochemicals and derivatives based on shale gas should account for a lot of the investment.
Vast new supplies of natural gas from previously untapped shale deposits represent one of the most exciting domestic energy developments of the past 50 years. After years of high and volatile natural gas prices, the new economics of shale gas are a "game changer," creating a competitive advantage for US manufacturers, leading to greater investment and industry growth.
Expansion of domestic shale gas production is helping to reduce US natural gas prices and create a more stable supply of natural gas for fuel and power creation. This benefits all American manufacturers.
However, lower natural gas prices offer an important additional advantage to chemical makers because they can use the gas as a raw material or feedstock. In the United States, historically it's been cheaper to crack ethane, propane and other natural gas liquids than to crack naphtha (from oil refining), the primary petrochemical feedstock in Western Europe and Northeast Asia. The ethane steam-cracking process is simpler and its hardware is less expensive. Nearly 90% of North American ethylene now comes from natural gas liquids. US ethane prices correlate (0.82) with the Henry Hub natural gas price and Western European naphtha prices highly correlate (0.97) with the Brent oil price. So, feedstock costs — and competitiveness — significantly depend on gas and oil prices.