A Brighter Mood For U.S. Chemical Makers

For the banquet speaker at its annual meeting, the American Chemistry Council typically picks a big-name pontificator from the political world. Last year, for example, former secretary of state Condoleezza Rice offered dinner attendees a sober assessment of trouble spots around the globe.

But this year, ACC, the U.S. chemical industry’s main trade association, hired Jay Leno, the comedian and former “Tonight Show” host.

Calvin M. Dooley, the association’s chief executive officer, said the change of pace reflects the lighter spirits in the chemical industry these days. Indeed, most executives at the meeting were in a buoyant mood. The economy could be stronger and the dollar could be weaker, but, overall, times are good for U.S. chemical makers.

The main reason for the optimism is the continued availability of low-cost hydrocarbon raw materials extracted from shale. “We’ve gone from being a high-cost producer in 2005 to being second only to the Middle East,” said Kevin Swift, ACC’s chief economist, at the meeting, which was held earlier this month at the Broadmoor hotel in Colorado Springs.

And to take advantage of the newly abundant feedstock, chemical companies are building plants. ACC counts 231 shale-related chemical production projects, valued at more than $142 billion, announced in the U.S. through late May. Of those projects, 61% represent investment by foreign companies. Peak spending will likely occur in 2017, the association says.

Shale oil and gas will also benefit downstream industries that consume chemicals, Swift noted. For example, ACC estimates that roughly 400 U.S. projects to convert polymers into finished goods have been announced in the past two years. But even with such outlets, chemical makers won’t find local homes for all their new output. As much as two-thirds of it will be exported, Swift predicted.

ACC used the occasion of the annual meeting to release a midyear economic outlook report. At a press conference, Swift said he expects U.S. chemical output to increase 3.2% this year and 3.0% in 2016.

The numbers are healthy, but perhaps not as healthy as might be expected given the amount of manufacturing investment planned. In fact, Swift said the new forecast is down from his earlier predictions, owing to first-quarter economic softness and the strong U.S. dollar.

Company executives pointed to other dampening effects. Pierre R. Brondeau, CEO of FMC and the chairman of ACC’s board, noted that his firm’s performance is being held back by weakness in the agriculture industry, where FMC records 75% of its sales. Owing to high crop inventories, he expects global agricultural chemical demand to be down 5% this year and then flat in 2016.

“We may have some of the lowest expectations of any company in ACC,” Brondeau said of his firm.

The Chinese market isn’t as robust as it once was, pointed out Mark C. Rohr, CEO of Celanese and chairman of ACC’s executive committee. That country’s annual economic growth, which for many years approached 10%, is now in the mid-single digits.

And whereas chemical sales in China once could be expected to rise in tandem with the country’s overall economic growth, they are not keeping up today, according to Rohr. He and Swift attribute the decoupling to the fact that China’s manufacturing sector, a big chemical consumer, isn’t growing as fast as its service sector.

The rapid drop in the price of oil over the past nine months is a mixed blessing, Swift said. “On the positive side, it’s a tax cut for consumers.” But with the price drop has come a 50% decrease in the number of U.S. oil rigs, which consume large quantities of drilling chemicals.

The points of weakness didn’t seem to trouble executives at the meeting. Swift, for example, defended the U.S. industry’s growth this year as robust given the headwinds of slowing global manufacturing and volatile oil prices.

Dooley added that the industry’s optimism stems from more than just economic factors. On June 3, a day after Leno regaled the dinner audience with jokes, the House of Representatives Energy & Commerce Committee approved a bill that would modernize the Toxic Substances Control Act (TSCA), the 40-year-old law for chemicals regulation that both industry and environmental activists agree is out-of-date.

Dooley expects the full House to vote on TSCA in late June and the Senate to vote before Congress leaves for its August break. The White House is likely to become involved in reconciling the separate bills, Dooley said, and he thinks it could become law before the end of the year.

He was dismissive of skeptics who question U.S. industry’s ability to capitalize on low oil and gas prices. Already, he noted, low prices are spurring technological advances that are trimming the cost of production and keeping the energy enterprise sustainable.

“We are increasingly confident that from an energy cost perspective we are in an incredibly strong position,” Dooley said. “This continues to be a very exciting time for the chemical industry.”