Major U.S. stock indexes tumbled dramatically on Aug. 24—and along with them the stocks of U.S. chemical makers—as investors reacted to the stock market decline that has hammered China since June.
“People are realizing that China is not going to be growing at 7% a year,” says Kevin Swift, chief economist at the American Chemistry Council (ACC), a major trade association. Adding to that realization is a further drop in the price of oil, which threatens the shale-gas-inspired petrochemical expansion in the U.S.
On Aug. 24, the Shanghai Composite Index fell more than 8.5%, continuing a decline that has totaled 38% since June. U.S. investors, already spooked because of China’s recent currency devaluation, reacted in kind.
The Standard & Poor’s 500 Index, which includes large U.S. chemical firms such as Dow Chemical and Eastman Chemical, was off 3.9% at the end of the day. The S&P dropped another 1.4% on Aug. 25 but then began to recover.
Compounding the market jitters has been the decline in oil prices from nearly $100 per barrel a year ago to around $40 recently. Chemical investors are concerned that low prices could hurt the profitability of shale-gas-inspired expansion projects in the U.S., which ACC now values at $147 billion.
ACC’s Swift acknowledges that about $3 billion in fertilizer-related projects were canceled in August and that other shale-dependent projects may now be delayed. Yet he says recent declines in U.S. natural gas prices still give U.S. petrochemical makers, which largely rely on gas-derived ethane feedstock, an advantage over oil-derived naphtha.
Still, declining oil prices are a nightmare for U.S. shale project planners. “A prolonged oil price recovery could shift the feedstock advantage from ethane back to a more cost-competitive naphtha,” says Don Bari of consulting firm IHS.
The stock market tends to react early, and large declines predict economic slowdowns only about half the time, says John E. Roberts, a stock analyst with investment bank UBS. What is clear, he says, is that the stock market is going through a volatile period as investors sort out the impact of recent events.