Tough second quarter for US chemical companies
1 minute read
US chemical company earnings came under pressure in the second quarter of this year.
A slowing economy meant lukewarm demand, while the uncertainty caused by the US-China trade war started to take hold as tariffs escalated.
But the numbers also reflect mixed signals. While the results are negative in comparison to the same period last year, earnings are up from the first quarter of 2019.
Analysts Hugh Hartzog and Ashish Chitalia take a closer look at the trends behind the numbers.
Fewer US homes and a dip in car manufacturing affect demand
New home construction and car manufacturing drive demand for many of the end-use products made from chemicals. And in the first half of this year, demand in the automotive, construction and industrial sectors took a hit in both the US and China.
China’s demand is declining due to higher tariffs as a result of the trade war. Meanwhile, new home permits in the US were down 6.6% in June 2019 when compared to June 2018, and seasonally adjusted housing starts were on average more than 4% lower through the first half of the year.
US-China trade war adds to uncertainty
At the start of 2018, market conditions for chemicals were robust. China’s ban on plastic waste imports had boosted virgin resin sales, and the effects of the trade tariffs were still developing.
Fast forward to 2019, and the ongoing heightened tariff environment continues to add to market uncertainty.
In reaction to the trade war, the Chinese government has taken several actions to stimulate the local economy. Examples include the reduction in personal income tax and value-added tax (VAT), an increase in export rebates and the currency devaluation.
We don’t yet know what the net impact of these measures will be, but many petrochemicals companies have seen improved sales volumes (although at a lower price) in the consumer segment.
We expect these measures will continue to drive positive consumer sentiment, especially for many petrochemical products.
Buyers exercise caution as crude oil price volatility increases
Volatility in the crude oil price and the slowing economy have added to buyers’ caution.
Typically, when these two factors combine, petrochemical and plastic resin buyers will wait for prices to bottom out and for markets to stabilise. Buyers tend to only purchase chemicals on an ‘as needed’ basis and are reluctant to commit to long-term deals and investments.
Brexit discussions, interest rate changes and bans on single-use plastics have only served to compound this reluctance.
How will the rest of 2019 shape up?
Assuming there are no major changes in trade tariffs, the rest of 2019 should be stronger than the first half.
Lower interest rates should support improved investor confidence, but risks of an intensifying trade war and economic slowdown still cloud the market.
We’ll be watching the demand-side fundamentals closely: these will prove essential to a more positive outlook for US chemical producers.
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