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OUTLOOK FOR CHEMISTRY AND THE ECONOMY
16 October 2018Michigan Chemistry Council
Lansing, MI
Martha Gilchrist MooreSr. Director – Policy Analysis and Economics
Presentation Overview
MacroOutlook
Key End Use Markets and Chemicals
Tariffs and Trade
0
1
2
3
4
5
6
2015 2016 2017 2018 2019 2020 2021 2022 GDP Trade Volumes Industrial Production
% growth
Global Deceleration after 2018
Source: ACC Survey of Forecasters
-20-15-10
-505
101520
05 06 07 08 09 10 11 12 13 14 15 16 17 18OECD CLI+6 Global Industrial Production Global Trade
The OECD CLI + 6, Global Industrial Production, and Global Trade
% Y/Y Change (3MMA)
Source: OECD, various national statistical agencies, ACC analysis
• Going into the end of 2018, global economic expansion remains resilient. Data through Q2 shows solid growth across many countries.
• World economic growth expected to edge higher to 3.2% in 2018. Expansion continues into 2019 with growth of 3.0%.
• Monetary tightening in most economies (except China), but still accommodative.
• Growth in global trade volumes peaked in 2017. Even without recent trade tensions, trade easing as global expansion matures.
Global Macroeconomic Situation
But, risks are intensifying• Oil prices rising• Rising trade tensions and protectionism are major threat.• Emerging markets remain under pressure; U.S. dollar is
strengthening and interest rates rising• Potential crisis in Turkey
Longer term, underlying demographics and disruptive technologies reshaping global economy.
Global Macroeconomic Situation
• Q2 growth surged on higher investment, consumer spending, and trade.• Moving into H1, positive momentum from inventories, spending, and
investment• Growth across multiple sectors in U.S. economy • Vehicle sales slowing, but remain robust (17.0 million in 2018; 16.8 million
in 2019)• Housing starts continue slow climb hampered by shortages of materials and
labor (1.33 million in 2018; 1.39 million in 2019)• Confidence high among consumers and businesses• Tax reform and budget act providing stimulus• Business investment rising• Manufacturing growth expanding; energy production reaching new records
U.S. Economy Continues to Accelerate
• Tightening labor market; wage growth accelerating• Inflation and wage growth firming Fed tightening• U.S. recovery/expansion is now the 2nd longest in post-war period• U.S. GDP growth of 2.9% in 2018 and 2.6% in 2019• Key risk from trade tensions – higher cost of imports; retaliation
against U.S. producers
U.S. Economy Continues to Accelerate
Outlook for End-Use Markets
Chemical Activity Barometer (CAB)
• Developed by ACC, the CAB is a leading indicator of broader industrial activity.
• CAB accelerated in September (following flat growth in August)
• Key production and inventory indicators remained positive
• CAB suggests further growth in business activity through the end of 2018
-25-20-15-10
-505
101520
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Recession Industrial Production Chemical Activity Barometer
% change Y/Y
Source: ACC
Housing and Vehicles Outlook
0
2
4
6
8
10
12
14
16
18
20
05 07 09 11 13 15 17 19 21
2016: 17.5 m2017: 17.2 m2018: 17.0 m2019: 16.8 m2020: 16.6 m2021: 16.8 m
Millions of Units (SAAR)
0
500
1,000
1,500
2,000
2,500
05 07 09 11 13 15 17 19 21
2016: 1.17 m2017: 1.21 m2018: 1.28 m2019: 1.38 m2020: 1.36 m2021: 1.41 m
Housing Starts (thousands)
Sources: Census Bureau, ACC Survey of Economic Forecasters Sources: Bureau of Economic Analysis, ACC Survey of Economic Forecasters
0102030405060708090
100
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Europe North America South America China Other Asia/Pacific Rest of World
Millions
Global Light Vehicle Sales by Region
Sources: OCIA (International Association of Motor Vehicle Manufacturers), Wards Intelligence
Vehicle Ownership per 1,000 People
0 100 200 300 400 500 600 700 800 900
United StatesCanadaPacific
Europe, WestEurope, East
BrazilCentral & South America
Asia, Middle EastChina
Asia, Far EastIndonesia
AfricaIndia
2005 2015
Source: Transportation Energy Data Book (Oak Ridge National Laboratory)
• In the U.S. more than $3,500 of chemistry in every light-vehicle (including 342 pounds of plastics and composites)
• More than 1 billion cars on the road today (plus 400 million trucks), doubling by 2040.
• Majority of growth coming from emerging economies• Disruptive technologies reshaping vehicle supply chain• Transition to electric vehicles• Requires broad expansion of road infrastructure
Key trends in Global Motor Vehicle Growth
Outlook for End Use Markets in U.S. (Consensus)
Source: ACC (October 2018)
US Recoveries/Expansions in HistoryDuration in Months
0 20 40 60 80 100 120 140
October 1949 - July 1953May 1954 - August 1957April 1958 - April 1960
February 1961 - December 1969November 1970 - November 1973
March 1975 - January 1980July 1980 - July 1981
November 1982 - July 1990March 1991 - March 2001
November 2001 - December 2007Average
June 2009 - ?????
Sources: NBER and ACC analysis
Outlook for Energy & Chemicals
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
86
88
90
92
94
96
98
100
102
104
Balance (right) Production (left) Consumption (left)
Global Oil Supply and Demand
18Source: EIA Short-Term Energy Outlook (October 2018)
-2.0-1.5-1.0-0.50.00.51.01.52.02.53.03.5
2013 2014 2015 2016 2017 2018 2019 2020OPEC Other Non-OPEC United States Russia Canada North Sea China World
Million barrels per day
Incremental Change In Oil Production
19Source: U.S. Energy Information Administration
U.S. Becomes Leading Energy Producer
0
2
4
6
8
10
12
14
94 96 98 00 02 04 06 08 10 12 14 16 18
Mill. Barrels per Day (BPD) Bill. Cubic Feet (BCF) per Day
45
50
55
60
65
70
75
80
85
90
3
4
5
6
7
8
9
10
11
12
13
94 96 98 00 02 04 06 08 10 12 14 16 18
Mill. Barrels per Day (BPD)
U.S. Net Imports of
Crude Oil and Petroleum Products
Source: EIA Short-Term Energy Outlook (August 2018)
Resulting in Surging Ethane Supply and Ethane Exports
0.0
0.5
1.0
1.5
2.0
2.5
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Ethane Domestic Demand Ethane Net Exports
Million Barrels per Day
Sources: U.S. Energy Information Administration and ACC analysis
Shale-Advantaged Chemical Industry Investment
Nearly $202 billion in new projects
68% is foreign direct investment
31%
22%
41%
6%
Complete Under ConstructionPlanned Delayed/ Uncertain
As of September 2018
-1
0
1
2
3
4
5
6
7
1997-17(average)
2018 2019 2020 2021 2022 2023
Chemicals (exc. pharm) Basic Chemicals Specialties Agricultural Chemicals Consumer Products
% change
US Chemistry Accelerating
US Basic Industrial Chemical and Synthetic Materials Production Outlook by Segment
70
80
90
100
110
120
130
Total Inorganic Organic Synthetic Materials
Production Index (2012=100)
Source: ACC Mid-Year 2018 Situation & Outlook
Year Total Inorganics OrganicsSyntheticMaterials
2016 1.6% -0.3% 2.9% 0.6%
2017 0.6% -7.1% 3.1% 0.6%
2018 2.8% -0.4% 1.5% 4.4%
2019 4.7% 3.5% 5.7% 4.3%
2020 3.9% 2.1% 5.0% 3.9%
2021 3.0% 1.6% 3.8% 2.9%
U.S. Specialty Chemicals
• With improved manufacturing growth in U.S. and abroad and recovery in oilfield & mining, specialties production surged in 2017, up 6.3%.
• Looking ahead, 4.6% growth expected in 2018.
• Strong manufacturing and mining sectors have boosted demand for specialty chemicals in 2018 with the largest YTD gains in: oilfield chemicals; electronic chemicals; cosmetic chemicals; corrosion inhibitors; flavors & fragrances; plasticizers; plastic addtives; biocides; coatings; foundry chemicals; and adhesives & sealants. -20
-15
-10
-5
0
5
10
15
05 07 09 11 13 15 17 19 21
% change Y/Y
Source: ACC Mid-Year 2018 Situation & Outlook
U.S. SPECIALTY CHEMICALSLONG TERM OUTLOOK
-1 0 1 2 3 4 5 6 7
Electronic ChemicalsOilfield Chemicals
Plastic CompoundingPlastic Additives
PlasticizersFlame Retardants
AntioxidantsCorrosion Inhibitors
Paint AdditivesBiocides
Rubber ProcessingCatalysts
Water Mgmt ChemicalsFood Additives
I&I CleanersAdhesives & SealantsFlavors & Fragrances
Historical (2012-17)
Future (2018-22)
% growth per year
Average Annual % Change
Year-over-Year
Segments with Slow Growth ProspectsPigments, 1.4Cosmetic Additives, 1.2Coatings, 1.1Foundry Chemicals, 1.1Lubricant Additives, 1.1Construction Chemicals, 0.7Dyes, 0.5Mining Chemicals, 0.3Paper Additives, 0.2
Segments ContractingPrinting Inks, -0.6Textile Specialties, -1.0
Thoughts on Trade
• USCMA
• SEC 232:• ALUMINUM & STEEL• AUTOS & AUTO PARTS
• SEC 301:• US-CHINA TRADE
• WTO
U.S. Trade Actions and Trade Partner Retaliation
U.S. Trade Actions and Trade Partner Retaliation
USMCA
Sec 301U.S.-China Trade
Sec. 232 TariffsAluminum & SteelAutos & Auto Parts
WTO
• Strengthened Rules of Origin• 75% value regional content (up from 62.5%)• Strong content requirement for core parts (i.e., transmissions and engines)• Labor value content requirement – 40-45% must be produced by workers earning at
least $16/hour• Strengthened ROO for auto parts• New rules phased in over 2-5 years (in line with model design lead times)
• Interstate Dispute Settlement Mechanism (ISDS) mechanisms preserved• New ISDS only covers investments in Mexico in certain sectors• Prevents any member from entering into a free-trade agreement with a “non-
market” economy, i.e., China.• Strengthens intellectual property protections
• Dairy and agricultural market access
U.S.-Mexico-Canada Agreement (USMCA)
IMPACTS
U.S. SECTION 232 TARIFFSALUMINUM & STEEL
Due to U.S. Tariffs on Imports:…increased costs to maintain and expand capital… direct impact to chemical plant maintenance and construction costsinvestments put on hold and/or cancelled; particularly painful consequences to projects in progress
…increased cost of essential inputs into downstream productsdecline in demand for U.S. chemicals decline in U.S. chemicals production, lost jobs, offshoring, investments put on hold and/or cancelled
Due to Retaliation on U.S. Exports: $3.5 B in chemicals exposed to retaliatory tariffs decline in U.S. chemicals production, lost jobs, offshoring, investments put on hold and/or cancelled
Tariffs on exports of downstream chemistry-containing productsdecline in demand for U.S. chemicals decline in U.S. chemicals production, lost jobs, offshoring, investments put on hold and/or cancelled
$3.5B U.S. Chemicals & Plastics
Exports exposed to Retaliatory Tariffs
U.S. SECTION 301 TARIFFSON US-CHINA TRADE
AND CHINESE RETALIATION
Aug 2017
U.S investigation into unfair trade practices by Chinese initiated
Mar 2018
Commerce releases findings that China is conducting unfair trade practices related to technology transfer, IP, and innovation
April 2018
U.S. announces 25% tariffs on 1,300 Chinese products, 2 lists: $34B + $16B
July 6 2018
U.S. tariffs on $34B (no chemicals) imposed; Chinese tariffs on 545 products (no chemicals)
July 102018
U.S. announces 10% (or 25%!) tariffs on $200B, 6,000 products (1,505 chemicals)
July 202018
U.S. threatens tariffs on up to $505B (basically ALL imports from China)
Aug 32018
Chinese tariffs on $60B announced (987 of 5,207 products are chemicals)
Aug 23 2018
U.S. tariffs on $16B imposed (includes $2.2B chemicals); Chinese tariffs on $16B imposed (includes $2.0B in chemicals/ plastics)
Late Sept/ early Oct
U.S. tariffs on $200B ($16.4B chemicals) likely imposed; Chinese tariffs on $60B expected includes $8.8B in chemicals and plastics
$11B U.S. Chemicals & Plastics
Exports exposed to Retaliatory
Tariffs
ECONOMIC IMPACT OF US-CHINA TRADE WAR
Source: Oxford Economics, 8/23/18
25% tariffs on US$50 B
+10% tariffs on
US$200B*+
Response from China that causes equivalent impact -1.4
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
GDP level (cumulative), difference from baseline, %
2018
2019
2020
ChinaU.S. World*note it could be 25% tariffs
on US$200B
Eurozone
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