⇨ Economists say the US is in for a recession in early 2023.
⇨ Lower demand is making for a weak US chemical outlook after a strong 2022.
⇨ US chemical producers enjoy raw material advantages over foreign competitors, but overseas demand might not support exports.
The US chemical industry is headed for a soft patch. Most economists expect a mild recession early this year, which would throw cold water on chemical demand and production. Advantageous raw material prices continue to make the US industry globally competitive, however, and exports should be brisk—provided that offshore demand holds up.
Already, higher prices born of inflation have hit the wallets of US consumers. In response, the Federal Reserve has been combating inflation by raising interest rates, which increases the cost of borrowing for major purchases like houses. Add weakening European and Chinese economies to the mix, and it spells a likely US recession.
“However, the recession is projected to be short and mild, amid a strong labor market and relatively healthy consumer and business balance sheets,” wrote the Conference Board, an economics think tank, in a November report.
The American Chemistry Council (ACC), an industry group, also expects a shallow recession. After a strong 2022, in which US chemical production rose 3.9%, the ACC forecasts that output will decline by 1.2% in 2023.
One reason, the group says, is that construction of new homes, a big market for the chemical industry, will slip in 2023 because of the high cost of borrowing.
But another big chemical market—automotive manufacturing—could be a bright spot, now that a computer chip shortage that had been weighing on the industry is clearing up. The ACC forecasts that US sales of light vehicles will increase from 13.8 million units in 2022 to 14.9 million this year. “There’s some decent pent-up demand for vehicles in the system right now,” the council’s chief economist, Martha Gilchrist Moore, told reporters in December.
As always, the US chemical industry’s fortunes will depend to a large degree on the global competitiveness of its ethylene and other basic petrochemicals. Ashish Chitalia, head of petrochemicals, polymers, and sustainability management at the consulting firm Wood Mackenzie, says business was good in the first half of 2022. Demand was strong, and a tangled supply chain kept imports out of the market.But toward midyear, he says, demand slowed and the supply chain straightened out. Inventories spiked and petrochemical makers had to reduce operating rates.
The industry will work down this inventory during the year, according to Chitalia. “We are expecting in the second quarter of 2023 we’ll see a balanced situation in North America,” he says.
Relatively low energy prices should be a positive for the US chemical industry in 2023. Russia’s invasion of Ukraine shocked energy markets in 2022. Oil prices soared, rising by about 50% through June before falling.
The war’s impact on natural gas prices was even stronger. It was greatest in Europe, which depends on Russia for much of its supply, but the US wasn’t spared. US natural gas prices hit their highest levels in more than a decade as producers redirected liquefied natural gas exports to Europe.
But US prices never got so high that natural gas was more expensive than oil on an energy-content basis. This is good news for US chemical producers, which typically extract petrochemical raw materials from natural gas instead of petroleum, as most of the world does.
“Right now, it costs twice as much to produce ethylene in Asia as it does in the US,” Chitalia says.
Michael McMurray, chief financial officer of the petrochemical maker LyondellBasell Industries, told the Citi Basic Materials conference in November that he is watching whether the Chinese market will be robust enough to draw US exports. China imports 40% of the polyethylene it consumes, but the country’s zero-COVID policies have slowed its giant economy.
“We really need China to kind of reopen, I think, for the overall demand environment to improve and hopefully for margins to start improving as well,” McMurray said.