Silicon Valley Bank, based in Santa Clara, California, failed on March 10 after depositors rushed to withdraw money amid fears about the bank’s health. It was the second-largest bank collapse in U.S. history. Regulators announced the following weekend that New York-based Signature Bank also had failed.
But what does this mean for the chemical industry?
Joseph Chang, global editor at ICIS, a source of Independent Commodity Intelligence Services, told Chemical Processing that “the implications for the economically sensitive chemical industry are huge, as a major step down in GDP growth or a contraction would crater demand in an already weak environment.”
Chang, in an email, further stated:
Prospects For the U.S. Housing Sector
The U.S. housing sector, a key chemical end-market that has already been hit hard by higher interest rates, could see lending for projects tighten further.
“While financial system stress has recently reduced long-term interest rates, which will help housing demand in the coming weeks, the cost and availability of housing inventory remains a critical constraint for prospective home buyers,” said Robert Dietz, chief economist at the National Association of Home Builders on March 15.
“And a follow-on effect of the pressure on regional banks, as well as continued Fed tightening, will be further constraints for acquisition, development and construction (AD&C) loans for builders across the nation,” he added.
Prior to the regional bank crisis, ICIS projected U.S. housing starts to fall 20% in 2023 to 1.24 million units.
Automotive Headwinds
Another key end-market for chemicals — automotive — could also see renewed headwinds as financing becomes challenged and consumers pull back from large purchases. Demand for engineering plastics, largely used in automotive, is under pressure.
“Demand for many engineering plastics is a dumpster fire further complicated by destocking activity. Q4 2022 demand for many converters was the lowest in almost 10 years,” said Ramesh Iyer, director, engineering plastics at Chemical Data (CDI).
“Incoming orders have improved. However, the confidence level on transactional activity is diminished as purchase orders keep getting postponed or cancelled,” he added.
Green Investments Under Threat
The banking turmoil also threatens funding for big green energy infrastructure and electric vehicle (EV) projects being incentivized by the $369 billion U.S. Inflation Reduction Act. While this provides significant funding in the form of tax credits and grants, external financing is still needed.
The IRA incentivizes production of EVs and EV batteries, solar cells, wind turbines and infrastructure for hydrogen and carbon capture and storage (CCS). This, along with the CHIPS Act to revitalize semiconductor production, is meant to spur a renaissance in high-tech U.S. manufacturing which will require massive volumes of chemicals.
Amid all the crosscurrents and uncertainty, one thing is clear. There will be no revival in U.S. manufacturing without stability in the financial system.
