Chemical industry should bounce ahead of the economy

Economists expect the US economy to make a dreary showing in 2024, though it should manage to avoid a recession. That outlook sets a low bar for the chemical industry, and—with a challenging 2023 over—analysts predict that the sector should clear it.

The Federal Reserve and its counterparts in other countries have been raising interest rates to rein in inflation. But those moves have slowed key sectors of the economy, including new housing.

In its 2024 economic forecast, Morgan Stanley writes, “With inflation cooling, central banks around the world face a Goldilocks dilemma: If they are too easy with monetary policy, inflation could come roaring back; but if they keep policy too tight, it could trigger a recession.”

The investment bank is optimistic that policymakers will succeed. It expects US economic growth to remain positive in 2024, at 1.9%, compared with 2.4% last year. Economists’ consensus forecast is 1.0% growth for the year, Morgan Stanley says.

Goldman Sachs is also bullish. “The heaviest blows from monetary and fiscal tightening are well behind us,” the bank says in its outlook report. It puts the chance of recession at only 15%, well below economists’ consensus of 48%.

Predictions from economists at the American Chemistry Council (ACC) are more in line with the consensus. The ACC forecasts that growth will slip to 1.1% in 2024. The trade group expects housing starts—home construction is a key consumer of chemicals—to slide from an already-sluggish 1.39 million in 2023 to 1.35 million this year. It expects light-vehicle sales to be flat, at about 15.5 million units.

But against that backdrop, the ACC thinks the US chemical industry will perform better this year than it did in 2023. It forecasts a 1.5% increase in chemical output, excluding pharmaceuticals, versus the 1.0% drop in output last year.

When pandemic lockdowns were lifted in 2022, consumers were eager to buy goods again. But after that bounce, demand receded in 2023. Companies along the supply chain, including chemical manufacturers, had too much inventory on their hands, and production slowed—giving industrial firms an early taste of the downturn in the broader economy.

“We think that has pretty much played out,” ACC chief economist Martha Gilchrist Moore said in a November conference call with reporters. “We are starting to see some green shoots of affirming demand in certain areas.”

Speaking at the Citi Basic Materials Conference in November, Dow CEO Jim Fitterling said the chemical industry could rebound quickly this year. As demand improves, “you’re going to see an immediate pull on our chain,” he said. “And that typically happens. Our industry typically goes into a recession first and comes out first.”

But even if it enjoys stronger demand, the petrochemical industry will be in a downturn because of excess supply—the result of massive capacity additions over the past few years. This situation has already eroded industry profitability.

“We will still continue to see petrochemical markets in this period of down cycle over 2023 and 2024—and finally recovery coming in towards the back half of the decade,” says Shruthi Vangipuram, senior research analyst for base chemicals at the consulting group Wood Mackenzie.

The US will be better positioned than other regions because it makes many products from low-cost feedstocks based on natural gas rather than naphtha, as Asia and Europe do, according to Vangipuram. “So for the polyethylene market, we’re still seeing a better position for the US versus other parts of the globe,” she says.

“But if you look at other value chains, like polystyrene, or some of the other aromatics-driven value chains, there you see a little bit more weakness come in because these are more oil dependent,” Vangipuram says. In addition, she notes, those markets are being dominated by massive complexes that have started up in China.