American Chemistry Council (ACC) Chief Economist Dr. Kevin Swift and ACC Senior Director Martha Moore presented the results of the "Mid-Year 2014 Chemical Industry Situation & Outlook" report in a webinar, on June 25, detailing the U.S. chemical industry's expected above-trend growth and solid demand through the remainder of 2014.

Strengthening fundamentals and the unconventional oil and gas advantage improve growth prospects in the US

The European economies appear to be emerging out of their secondary recession but the recovery is tepid. Gains in the United Kingdom, Germany and a few other nations will be more dynamic. Inflationary pressures have eased, and monetary policy around the world is accommodative.

The manufacturing sector, which represents the primary customer base for chemistry, entered a soft period in 2012 with particular weakness in Europe and East Asia. The global industrial cycle, however, is beginning to turn upwards, led by the United States, the United Kingdom, Germany and other nations. Global industrial production is expected to accelerate during 2014 and into 2015.

In the United States, the economy suffered in the 1st quarter largely due to adverse winter weather as well as a slight inventory imbalance and lower net exports. A reversal of these temporary factors is underway. As finances, consumer balance sheets, employment, and incomes improve a strong rebound of activity is expected. Furthermore, reduced uncertainty will give way to improved business confidence and a return of capital spending. For housing, low interest rates and rising employment will continue to provide support, though the recovery remains uneven. Light vehicle sales, however, continue to grow steadily with 2014 sales expected to crest the 16 million mark for the first time since the recession. Industrial production is expected to grow by 3.7% in both 2014 and 2015. Industries supplying to building and construction and light vehicles are doing well as are capital goods-related (especially energy) industries. Food and non-durable consumer goods offer slower prospects.

Overall, growth in the US economy will continue into 2015 and we can see this by examining the trends in ACC's Chemical Activity Barometer (CAB). The CAB is a composite index of economic indicators that track the activity of the chemical industry. Due to the chemical industry's early position in the supply chain, the CAB can be used to anticipate potential turning points in the overall economy. The CAB is currently signaling further economic growth into 2015. Although the consensus forecast for US GDP is for moderated growth, at about 2.3%, this will likely improve to 3.2% in 2015. Furthermore, the US is in the midst of an unconventional oil and gas boom which is supportive of economic growth and industrial activity. Long-term growth in the economy after this decade, however, will be more muted due to demographic, policy and other factors.

Major risks include the housing situation. Activity has stalled recently and though some of this was due to weather-related factors, household formations remain low and lending standards remain tight. The bank lending situation in China is still of concern and more recently the outbreak of violence in Iraq has roiled oil markets. An oil supply shock and accompanying surge in prices could set the foundations for a global recessionary environment.

US and World Chemistry Situation & Outlook
Outlook for the Best Performance in Global Chemical Industry Since 2007

An improvement in global manufacturing will aid US chemistry and volumes will continue to gain. Improving customer industries and the enhanced competitive feedstock position will support US chemical industry production going forward.

The consensus is that US chemical output will improve during 2014 and into 2015. Indeed, our current expectations for 2014 are 0.5 percentage points higher than our year-end 2013 outlook. As a result, for chemistry, following the 0.1% gain in volumes during 2012 and 1.3% gain in 2013, expectations are now for a 3.0% production gain in 2014 and improving to a 3.4% gain in 2015. Strong growth is expected in plastic resins and organic chemistry as export markets revive. Production of specialty chemicals will be driven by strong demand from end-use markets; including light vehicles and construction. Strong 2014 gains are expected in agricultural chemicals as well. During the second half of the decade, US chemistry growth is expected to expand at a pace (over 4% per year on average) exceeding that of the overall US economy. Pharmaceuticals will eventually emerge as a growth segment at that time. Although projected year-on-year growth rates for most segments appear good over the next few years, they must be considered in the context of the exceptionally sharp declines seen during the recession.

Global chemistry set to expand - largest gains in developing nations

In global chemistry, the recession in Europe and the slowdown in China and other emerging markets clearly affected global chemistry volumes in 2012 and 2013. Overall global production advanced only 2.0% on average during these years. The recovery in Europe has emerged and is strengthening. With improving economic prospects, headline growth will average 3.9% per year through 2019. The most dynamic growth will be found in the developing nations of Asia-Pacific, Africa & the Middle East, and Central & Eastern Europe. Due to competitive advantages from shale gas, growth will be strong in North America as well. At times, US performance dynamics will be comparable to those in emerging markets. Western Europe and Japan will lag. With strengthening production volumes, global capacity utilization will improve in the years to come.

US Chemistry Expanding Across All Regions

In the US, growth is expected to improve across all regions during 2014 and into 2015. The highest growth rates are expected in the West Coast and Mid-Atlantic regions in 2014, reflecting gains in specialty chemicals and pharmaceuticals produced in those regions. Gains will continue through 2015 in nearly all regions. Chemical production accelerates, especially in the Gulf Coast and Ohio Valley regions, over the next several years as significant shale-driven chemical capacity begins production.

Chemical industry adding good jobs

In stark contrast to the previous decade, chemical industry employment is growing due to renewed competitiveness. The industry gained 9,000 jobs during 2013 and employs 793,000. As new production of basic chemicals, resins, fertilizers, and other shale-advantaged chemicals comes online, new jobs will be created to support the expansion. Because chemical industry workers are among the highest paid in manufacturing, growing payrolls will strengthen local economies.

Conclusion

With 2014 half over, the business of chemistry is on an upswing. Continued recovery in end-use markets, an improving global economy, and a shift in competitiveness will lift demand for American chemistry over the next several years. ACC expects to see above-trend growth in basic chemicals over the forecast horizon, in addition to solid demand in other segments.  

With the development of shale gas and the surge in natural gas liquids supply, the US has moved from being a high-cost producer of key petrochemicals and resins to among the lowest-cost producers globally. This shift in competitiveness is boosting export demand and driving significant flows of new capital investment toward the US We anticipate that recently announced new capacity for chemicals will significantly expand production when those investments come online beginning in 2015. As a result, the recent pattern of trade deficits and smaller payrolls is shifting course and by mid-decade American chemistry will post record trade surpluses. In addition, the industry is expected to add high-paying jobs through the end of the decade. In a stark reversal to the trends of a decade ago, American chemistry is poised for a dynamic period of growth.