For many, 2012 and 2013 may be two years to forget as austerity in developed nations, recession in Europe, slowdown in China, and uncertainty all combined to hinder growth. The European economies seem to be emerging from a secondary recession but recovery is tentative at best. The BRIC [Brazil, Russia, India and China] economies have been weighed down (much like a brick) but it does appear that China now is improving. Inflationary pressures have eased and monetary policy around the world is striving to foster growth.
The manufacturing sector represents the primary customer base for chemicals. Global manufacturing entered a soft period in 2012, with particular weakness in Europe and East Asia. However, manufacturing is beginning to turn upward, led by the United States, the United Kingdom and other nations.
In the United States, the economy is stuck in a slow-growth mode as higher taxes, debt and regulatory burdens combined with political uncertainty take a toll on both business and consumer confidence. As a result, businesses were cautious and cut back on capital spending. Furthermore, weakness in overseas markets and a higher value of the dollar against other currencies dampened U.S. exports. However, light vehicle sales, housing activity and asset prices are moving higher and employment slowly is improving, and so consumers are spending. Moreover, the United States is in the midst of an unconventional oil and gas boom that supports economic growth and industrial activity.
The Chemicals Activity Barometer (CAB) is encouraging. The CAB, which was developed by the American Chemistry Council (ACC) and appears monthly in CP's Economic Snapshot, is a composite index of economic indicators that tracks the activity of the chemical industry. Due to its early position in the supply chain, chemical industry activity leads that of the overall economy. So, the CAB provides a way to anticipate potential turning points in the overall economy. The CAB currently is signaling slow, tentative economic growth in 2014. The consensus forecast (our base-case scenario) for U.S. gross domestic product (GDP) is for continued but modest growth in 2014, about 2.6%, which is well below the historic trend, increasing to 3.1% in 2015 and beyond (Figure 1). Many macroeconomic factors are projected to improve over the next two years (Table 1). However, long-term growth in the U.S. economy will slip due to demographic, policy and other factors.
Chemicals production is benefiting from strength in the light vehicles and aircraft sectors, and a recovery in construction materials and some industries involved with business investment. However, a number of sectors (appliances, textiles, paper, printing, etc.) still remain weak. Forward momentum depends upon demand for consumer goods, which ultimately drives factory output.
Light vehicles represent an important market for chemicals (nearly $3,550 per vehicle), and production continues to improve. U.S. sales are expected to rise in 2014 and 2015 as pent-up demand, improving employment (and income) prospects, and better availability of credit foster growth. Housing is the other large consumer of chemicals (over $15,000 per start) and here housing prices have begun to appreciate, credit conditions appear to be repairing, and favorable demographic factors are reemerging as a driving force. So a gain in housing starts should occur in 2014 and 2015. Activity should remain well below the previous peak of 2.07 million units in 2005 but, by the second half of the decade, activity should approach the long-term underlying demand of 1.5 million units per year as suggested by demographics and replacement needs.
Basic chemicals — inorganic chemicals, petrochemicals, plastic resins, synthetic rubber and man-made fibers — were hardest hit by the recession in Europe and manufacturing slowdown, despite improving demand from important customer markets such as light vehicles and housing. Downstream customers remain cautious about building inventories, but improvements in final demand could necessitate replenishing. Leading indicators of manufacturing activity aren't yet pointing to strong growth.
The consensus is that U.S. chemicals output should improve during 2014 and into 2015 (Table 2). The volume of chemicals, excluding pharmaceuticals, which grew 2.1% in 2012 and 2.5% in 2013, should rise by 2.8% in 2014 and a 3.3% in 2015. Plastic resins should see strong growth as export markets revive. Meanwhile, robust demand from end-use markets, most notably light vehicles and housing, should drive increased production of specialty chemicals. Strong 2013 gains are expected in consumer products as well but these gains will moderate in 2014 and 2015. Demand for agricultural chemicals (and their supply from the United States) should revive. In the long-term, chemicals output growth should expand at a pace exceeding that of the overall U.S. economy. Pharmaceuticals should emerge as a growth segment in 2015.