The view ahead in global markets
As to the outlook for the industry for the next year or so, expect more of the same or even a bit worse for companies that are unwilling to take steps to address the continuing uncertainty in major markets — and that sidestep the need to change the status quo. In 2017, barring a recession in the U.S. and Europe or a slowdown in China, Moody’s Investor Service expects EBITDA in the chemicals industry to slip by 1 or 2 percent year-over-year.
Breaking this down by market, in the U.S., the new administration is likely to embrace policies that are antithetical to free trade and globalization as well as to reduce regulations on businesses. To a degree, this could increase demand for chemicals by stimulating domestic manufacturing investment. But the other side of the coin is more problematic for chemicals companies: If the U.S. impacts trade flows, producers that depend on access to international markets or that plan to make resource investments outside the U.S. could be harmed.
In the eurozone and the United Kingdom, monetary easing has not translated into significant growth or demand gains for chemicals companies. Moreover, the economic, political, and legal questions brought on by Brexit cloud the economic outlook in the U.K. and could put a damper on industrial manufacturing activity. Key elections in France, Italy, and Germany, which may move these countries toward more protectionist and insular biases — similar to the U.S. — could have a strong effect on whether chemicals companies can collaborate and grow within the European Union.
The Middle East is in the throes of a fundamental economic restructuring; low oil prices have frightened countries in the region into at least giving lip service to reducing dependence on revenue from fossil fuels and diversifying their economies. That, in fact, is the impetus behind Saudi Vision 2030, a far-reaching program that aims to, among other things, increase Saudi Arabia’s non-oil exports as a share of GDP to 50 percent from 16 percent today. This plan and similar ones being developed in the Middle East encourage more local production of consumer and business goods for both domestic and export markets. Thus, chemicals companies will need to figure out how they can participate in the Middle East by supporting and facilitating the region’s diversification and localization aspirations.
Asia, and more specifically China with its GDP growth of 6 percent (almost double that of the rest of the world), remains a bright spot in the chemicals firmament. But in China, too, a tectonic shift is under way as its economy moves from being export driven to one based on domestic consumption. Margin pressures are increasing among domestic chemicals producers due to an overcapacity in basic commodities and in certain value chains (such as acrylonitrile-butadiene-styrene [ABS], a popular plastic used in manufacturing, and purified terephthalic acid [PTA], a polyester) as well as inefficient plants and processes. Moreover, a 6 percent growth rate in China represents a significant drop from a few years ago and heralds a slowdown in chemicals industry end markets, including automotive, construction, and pharmaceuticals, that enjoyed heady double-digit expansion for years.