Business is on the Upswing throughout the Industry
According to the latest monthly report from the American Chemistry Council (ACC), U.S. chemical output increased on a monthly basis in February as higher production around the country neutralized a decline in production on the Gulf Coast.
The trade group went on to say that the U.S. Chemical Production Regional Index (CPRI) went up 0.3% in February with gains in six of seven regions in the manufacturing sector. This represents an improvement over flat production in January that was adversely affected by severe winter weather.
Moore Economics created the U.S. CPRI to track chemical production in seven regions nationwide. It is comparable to the Federal Reserve’s industrial production index for chemicals. A three-month moving average is used to measure the CPRI.
Manufacturing is the barometer that gauges the health of the overall economy. It is a major driver for the chemical industry since chemicals are involved in nearly 96% of manufactured products.
The ACC predicts national chemical output to rise 2.5% in 2014 and expects to realize as much as a 3.5% gain next year. Globally, ACC believes production will move up 3.8% in 2014 and 4.1% in 2015 with healthy gains expected across North America and emerging markets.
Although it is too early to tell the accuracy of the ACC predictions, output from the U.S. manufacturing sector, the biggest consumer of chemical products, was flat in the first month due to the aforementioned winter weather that also caused disruptions in distribution. Nonetheless, several chemistry end-user markets experienced gains within the sector from industries that included aerospace, machinery, computers, plastic and rubber products, paper and printing.
The ACC also said that chemical production was mixed across the segments in February. Rise across chlor-alkali, industrial gases, dyes and pigments, acids, consumer products, coatings, adhesives, pesticides and pharmaceuticals as well as other specialties were capped by declines in organic chemicals, fertilizers, plastic resins, synthetic rubber and manmade fibers. On a region-by-region basis, gains were realized across Midwest, Ohio Valley, Southeast and West Coast regions.
The approximately $770 billion U.S. chemical industry is by nature, cyclical, and heavily linked to the condition of the overall U.S. economy. The industry has consistently led the U.S. economy’s business cycle because of its early position in the supply chain.
According to the analyst reports from the major chemical makers such as DuPont, Dow, Eastman Chemical, and Celanese, 2013 was a tough year due to a weak European economy, effects of sequestration in the U.S. along with industry-specific challenges that prevented a meaningful upswing in chemical demand for the greater part of the year.
Despite the sluggish recovery of the European chemical industry, the U.S. chemical business is expected to keep pace with the overall improvement in the U.S. economy due to the gradually convalescing housing market, strength in agriculture, space, and light vehicles, and healthy gains across North America and other emerging markets coupled with worldwide demand.
Key Chemical Market Overviews
Citing market overviews of several key chemicals, gives a realistic perspective on the state of the U.S. market.
The U.S. ethylene market shows promise for a strong 2014, with margins expected to remain high on the continued dominance of lighter feedstocks, mostly ethane. Ethylene supply is expected to increase as several expansion are completed that could lead to lower prices. Most market pundits cautiously predict steady to possibly higher demand, but are waiting for the economy to take a more clearly defined direction.
U.S. polyethylene (PE) prices held steady in January and two U.S. producers announced separate price increases of 4 cents/lb. for February contracts. However, industry sources have said t s much too early to gauge the potential success of February price increases that are dependent on whether the market tightens in advance of planned cracker turnarounds in April. Experts say that the greatest impact in the first quarter will be from the volatility of currency fluctuations.
U.S. polypropylene prices rose slightly in January. Participants anticipated an increase of as much as 7.5 cents/lb. to match the most recent nomination for January polymer-grade propylene. Additional increases are expected later in the first quarter ahead of planned cracker turnarounds. Both buyers and suppliers are anticipating growth during the first quarter.
In other industry news, the oil spill that closed Galveston Bay and stopped traffic in and out of the ports of Houston, Texas City, and Galveston is unlikely to seriously impact chemical production or shipping, say analysts at IHS Chemicals. Should there be an extended closure, however, aromatics and methanol derivatives could be affected. The spill occurred around noon on March 22, when a barge carrying 900,000 gallons of bunker fuel oil from Texas City to Bolivar, TX, collided with a cargo ship. When a single compartment of the barge was breached, 168,000 gal of oil was released into the harbor.
Although winter weather has continued to hurt the economy, industry experts say equity prices in the industry drove the monthly chemical activity barometer (CAB) up. The CAB gained 0.3% over March on a three-month moving average basis. The gain points to modest but continued growth through the fourth quarter. Year-on-year, the CAB is up 2.5%, and the February number was revised to 94.4, according to the American Chemistry Council.
Toxic Substances Control Act
Lawmakers are deciding whether legislation to reform the Toxic Substances Control Act should remove states’ authority to set their own chemical regulations. The chemical industry supports pre-emption to avoid a patchwork of state regulations. “This year alone, 15 state legislatures have introduced unique chemical regulation proposals,” the American Chemistry Council noted.
Specifically, Republicans in the House of Representatives have rolled out draft legislation to overhaul the federal law that controls commercial chemicals.
Rep. John M. Shimkus (R-Ill.), chairman of the House Energy & Commerce Subcommittee on Environment & the Economy, says the draft bill is a starting point for discussion among lawmakers. The draft, which was released late on Feb. 27, will likely be changed before it is formally introduced, Shimkus says.
Among other things, the draft bill would require EPA to divide all commercial chemicals on the market into two categories, low or high priority, depending on whether existing information on a substance suggests it might pose a risk to human health or the environment. EPA would assess each high-priority chemical for safety, then either deem it safe for its intended uses or regulate it by requiring labels or restricting or phasing out its use. Low-priority chemicals, for the most part, would not be assessed.
Democrats are engaging with Republicans on the legislation, Shimkus says. But brokering a bipartisan deal might prove tough.
Shale Oil & Gas: U.S. Natural Gas Drilling to Escalate
According to the financial analysts at Raymond James & Associates Inc., U.S. natural gas drilling is predicted to escalate for the first time since 2010.
Although natural gas-directed drilling in 2013 was at its lowest average in more than 20 years, the financial pundits expect activity to increase in 2014 on Northeast expansions alone, producing the first gains in onshore drilling since 2010.
Statistics reveal that gas-directed drilling has historically been the most active part of domestic production, that changed with the 2008 gas price collapse and the surge on oil prices the following year.
Gas prices have seen a rebound over the past few weeks, but drilling has only increased in two areas: the Utica and Marcellus shales, analysts J. Marshall Adkins and Praveen Narra said. They believe that trend likely will continue in 2014.
“Specifically, we expect the Utica and Marcellus to grow by 45 rigs combined” in 2014 on “extremely low breakeven economics and growing pipeline infrastructure.”
“In fact on an energy content basis, oil has roughly six times the energy content of natural gas; however, oil currently trades at 22 times the price of natural gas,” said the analysts. “In other words all else equal (i.e., costs), the incentive to drill for oil is four times the incentive to drill for natural gas. So we still expect the vast majority of E&P drilling capital expenditures to be directed toward oil wells; however, we note that we expect gas rigs to be up on average for the first time since 2010.”
They went on to say that increasing U.S. oil supply is outpacing slugging global demand, leading some analysts to speculate that oilfield service activity will decline in 2014. However, Adkins and Narra believe U.S. activity should remain stronger than falling oil prices would suggest, with 2014 domestic E&P spending up by 5-10% on “surging oil and gas production volumes and industry underspending in 2013.”
Trained Labor Shortages becoming problematic for U.S. Petrochemical Industry
Apparently, not enough people are being trained to build, operate and maintain U.S. Gulf Coast petrochemical projects, which may impose constraints as expansions get underway in 2015, a top executive said this week. Meanwhile, the Department of Interior is losing employees to the private sector because it pays better, creating a vacuum within the Bureau of Land Management (BLM) that has led to less oversight and longer permitting times, particularly for the Bakken Shale.
Chevron Phillips Chemical Co. LP (CPChem) CEO Peter L. Cella discussed the lack of an adequate petrochemical workforce at the American Fuel & Petrochemical Manufacturers Conference in San Antonio. Not enough skilled workers, he said, is the most significant barrier facing future projects.
A lack of skilled workers isn’t only expected to hamper Gulf Coast expansions. North Dakota last month joined forces with Hess Corp. to lure 20,000 workers for jobs in the Bakken/Three Forks formation (see Shale Daily, March 19). ExxonMobil Corp. CEO Rex Tillerson also last month urged energy sector partnerships with the building trades and colleges to create a sustainable, skilled workforce.
Are Gas-Only Rigs a Dying Breed? So says the EIA
According to the Energy Information Administration (EIA), the number of wells drilled in the United States that produce both oil and natural gas has increased sharply since 2007. This means that natural gas production can rise even as the number of rigs characterized as drilling solely for natural gas falls.
“In the past, the number of gas-oriented drilling rigs in a particular region has been a common metric for estimating the production of natural gas. However, technological advances have led the way to the widespread use of new oil and natural gas extraction techniques that have opened up a hydrocarbon resource base dramatically larger than previous estimates,” EIA said.
The number of wells drilled that have produced both oil and natural gas increased to 56% in 2012 from 37% in 2007; at the same time, gas-only rigs, the number of gas-only rigs fell to just over 20% last year from about half the market in 2007.
Baker Hughes Inc., an oilfield services company famous for its rig count, has added a well count to the slate of data it provides to the industry. The idea is that when combined with its Rig Count, drilling efficiencies can be tracked by basin, a company spokesman said in an Oct. 15, 2013 Shale Daily article.
Although the market for new technology remains high, the completion services market, specifically pressure pumping, or hydraulic fracturing, “is less sanguine,” they said.
The average U.S. rig count in the final three months of this year should decline by about 2.5% from 2Q2013, a typical seasonal slowdown around the holidays, and above the pronounced drop in the same period of 2012, when the rig and well count fell by more than 5%, according to Baker Hughes.
Prediction: S&P 500 set to fall to 1,800 in the next few weeks
So says Michael Kling of Money News quoting chartist Avi Gilburt in an article written for MarketWatch. “Although the stock market may continue to rise, bearish signs outnumber bullish indicators.” Traders are advised to remain cautious untul patterns reveal the market’s direction.
Some observers believe a triangle pattern is emerging in stock trading as daily highs and lows compress. While those patterns can point to either a market surge or decline, “quite often, these triangles break down and open a trap door which most will not be expecting,” warns Gilbert, author of ElliottWaveTrader.net, an online member forum.
Gilbert sees three possible patterns — two bearish and one moderately bearish. However, emerging patterns should soon show traders where the market is heading.
CNBC’s Ron Insana supported this premise in an unrelated article defending his prediction of a 20 percent stock plunge.
According to Insana, the stock market is ripe for a correction that could push the market down 10 to 20 percent.
“While I have to acknowledge that, in the short term, that seems like a bit of a blunder, given the new intraday highs in the S&P 500, the transports and other major averages, I’m not sure it is prudent to back away from that call,” he writes on CNBC.com.
Meanwhile, the Standard & Poor’s 500 Index hit another record peak Wednesday.
Insana offers a host of reasons for a correction. First, technical indicators aren’t that strong, he says. “Seasonal factors are about to turn negative, and geopolitical and global economic concerns are lingering.”
He concluded his article saying, “We are in positive economic data territory but to continue to make new highs, we are going to have to see improvement, not just good, but great and that is why we are holding tight here,” Art Hogan, chief market strategist at Wunderlich Securities, told Reuters.
Sustained 3 percent growth would warrant rate hike
The U.S. economy needs to be growing at roughly 3 percent in annual terms to justify a hike in interest rates by the Federal Reserve in the second half of next year, a top Fed policymaker said on Wednesday.
In comments to a business event in Miami, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said he thinks the economy will perform that well beginning in the current quarter.
The faster economic growth, he said, would help some part-time workers get more hours at their jobs and also goad more people who are out of work to restart their job hunts. Lockhart said he thought growth would trend at around a 3 percent annual rate in the second quarter of this year “and beyond.”
Signs of weak growth in the first quarter, he said, would likely prove temporary because they were due to a severe winter.
On the lighter side of the economic news, we must ask:
Is it time for a hamburger tax?
If people want to eat meat, they should be taxed according to the true social and environmental impact of the agricultural infrastructure needed to produce their meals, argues Charles Kenny of Bloomberg Businessweek. Instead of subsidizing farmers, we should be taxing consumers more heavily to reflect the true cost of meat. “Let’s smash that pork barrel and put in place a per-pound meat tax instead, perhaps weighted by the environmental and health footprint of the particular kind of meat and production techniques,” Kenny writes.
As tax season ramps up, we’re bound to hear proposals aimed at making the revenue system simpler and more efficient. A perennial is the “sin tax.” Rather than tax earnings—when we really want people to earn money—why not tax things we don’t want people to do? Add duties to cigarettes, alcohol, and carbon dioxide to slow people’s smoking, drinking, and polluting, and you’ll do them and the world a favor while raising revenue for schools, hospitals, and roads. But why stop there? It’s time to add one more sin to the list of habits that should be taxed: excessive meat consumption.