Chemicals

The State of The Chemical Industry

The chemical industry generates $486 billion annually and employs 529,000 Americans, and 96% of all manufactured goods are directly impacted by this industry, reports the American Chemistry Council’s (ACC) 2021 Guide to the Business of Chemistry.

“While risks for the global economy remain, the U.S. chemical industry is in a strong position going into 2022,” said Martha Moore, ACC chief economist, in an ACC press release about the organization’s yearly outlook report. “Supply chain bottlenecks appear to be easing, and momentum is rising as manufacturing activity resumes and inventories are rebuilt. American chemistry is poised to accelerate as strong consumer demand and restocking drive growth.”

From an investment standpoint, chemistry stock has traditionally been considered a good investment because the industry has historically overperformed.  However, from 2017–2019, in terms of shareholder returns, the market showed a 1.6% decline, reports McKinsey & Co.

McKinsey’s analysis attributes the downturn to a growing number of Chinese competitors in the industry, which has resulted in decreased return on investment capital and a downward trend in volume growth.

Due to increased regulatory requirements, a call to ban fossil fuels, upstream and downstream emissions concerns, and plastic pollution and toxicity reports, the industry remains under fire from multiple directions.

To be fair, these pressures are nothing new, and the industry has proven adept at meeting these challenges.

“As the chemical industry moves into 2022, strong demand for both commodity and specialty chemicals should keep prices robust throughout the year. The industry should also experience increased capital expenditure as leading industry players focus on building capacity and expanding into growing end markets through both organic and inorganic routes. However, the industry could face margin pressures amid raw material cost inflation, which will likely remain high through the first half of 2022,” reports Deloitte’s 2022 Chemical Industry Outlook.  “One of the critical areas of focus for most US chemical companies in 2022 will likely be sustainability and decarbonization. Many chemical companies are expected to increase investment in research and development (R&D) capabilities and leverage advances in decarbonization and recycling technologies to lower their and their customers’ carbon footprint, as well as reduce plastic waste. As a result, 2022 should see more industry players create goals and plans around abatement of emissions and monetization of waste.”

Industry outlook predictions

The ACC publication “Year-End 2021 Chemical Industry Situation and Outlook” makes the following predictions for the chemical industry in 2022:

  • Growth of 5.7% in gross domestic product (GDP), 5% growth in world trade, and 4.2% growth in global industrial production;
  • Basic chemical volume growth of 5.1% and 4.1% volume growth in specialty chemicals;
  • A 1.9% growth rate in chemical industry employment;
  • Chemical industry capital spending gain of 4.5%;
  • U.S. chemical exports valued at $162 billion, which is a growth prediction of 7.3%; and
  • Growth of 13.7% in U.S. chemical imports.

Opportunities

The chemical industry has a huge opportunity ahead in the area of carbon capture (CC) technology, which is a chemical process, reports Chemical & Engineering News (C&EN). “The chemical industry has a special relationship with [CC]: it’s both a potential customer and a key technology supplier,” the C&EN article says. “Chemical firms have a lot of the needed know-how, and the start-ups coming to market are full of chemists and chemical engineers. … In 2022, expect to see CC to become part of the chemical industry’s social license to operate. Also expect even more project announcements, both for chemical plants and for other hard-to-abate heavy industries like steel and cement.”

Growth in three primary end markets is expected to drive demand for U.S. chemical production in 2022, the Deloitte report adds.

1. Construction

2022 housing starts are predicted at 1.5 million. This robust construction activity will likely lead to high demand for chemical products, such as polyvinyl chloride and methanol, Deloitte predicts.

2. Automotive

Auto sales are expected to remain strong in 2022, which will drive demand for performance plastics and base chemicals.

3. Health and safety

Coronavirus concerns will continue to drive demand for products requiring ethylene and propylene, including masks, gloves, and gowns. Isopropyl alcohol and ethanol will remain in demand for products used to fight the virus.  Additionally, demand is expected to remain high for chemicals necessary to produce “antibacterial wipes, disinfectants, and surfactants for soaps and hand sanitizers,” Deloitte notes.

Challenges

1. Persistent supply chain disruptions

The COVID-19 pandemic revealed the vulnerability of global supply chains as borders and ports closed in an attempt to control the spread of the worldwide virus. It also created a labor shortage, as many were reluctant to return to work.  This, in turn, produced bottlenecks for the transportation industry to move goods and created materials shortages. 

All industry is advised to continue to diversify its supply chains and ensure maintenance of inventory levels to ride out times of uncertainty and disruption.

2. Systematic inflation

“Economic data often doesn’t generate major headlines, but the latest release of the US consumer price index (CPI) did just that,” the Deloitte article “Keep watch, keep calm: The impact of inflation on business” says. “The index rose 7.9% in the 12-month span ending February 2021—the steepest annual increase since February 1982. … The convergence of Russia’s invasion of Ukraine and new COVID-19 lockdowns in China are adding to business and consumer concerns that America’s inflation rate—now at a 40-year-high—will remain high well into 2022. Restrictions in China will likely complicate efforts to solve supply chain challenges, while the situation in Ukraine bolsters the prospects of price shocks around food and energy. So far, higher prices have mostly reflected specific supply chain issues, which will likely be resolved over the next six-to-twelve months. In the meantime, there’s reason to expect businesses can overcome inflation. That’s why many economists … are forecasting inflation to moderate later in 2022.”

3. Trade tensions

During the Trump administration, trade tariffs were put in place on many products from both the United States and China. The chemical industry was hit particularly hard by these tariffs, as it had invested billions of dollars in building natural gas plants along the Gulf Coast based on the premise that chemical demand from China would continue to increase. The tariffs meant that this premise was made in error. In addition, this resulted in chemical companies having to find other sources for imports and new countries for exports. Those relationships can take years to establish.

“Like many, we had hoped that some of the trade policies and tariffs of the last administration would be rolled back,” states an introductory letter by ACC President and CEO Chris Jahn to the organization’s 2021 Year in Review publication. “That didn’t happen. But we still made progress on ACC trade priorities and are pleased to see a more predictable environment for international trade.”

4. Weather events

Weather-related events such as a surge in hurricanes and a February 2021 deep freeze in Texas resulted in production outages along the U.S. Gulf Coast. Due to climate change, hurricanes are predicted to continue to increase in frequency and severity, which will continue to negatively impact the chemical industry, resulting in unpredictable production levels and the high probability of “more frequent and severe industrial chemical spills,” CHEM Trust says.

5. Cybersecurity

“Industrial espionage — stealing valuable intellectual property, which is then sold by cybercriminals to a competitor — is arguably the number one cybersecurity threat facing the [chemical industry],” reports Chemical Engineering. “This is followed by ransomware, whereby malicious actors encrypt systems or information, or in the recent case of the Colonial Pipeline in the U.S., shut production down, in order to gain money by extortion … but strong foundational security controls can help prevent or limit the damage from an array of cyberattacks.”

6. Reducing emissions

The chemical industry regularly sets targets for reducing scope 1 (carbon emissions from the manufacturing process) and scope 2 (carbon emissions from energy generation for operations) emissions. “In 2022, the norm in the chemical industry will start moving from measuring and reporting scope 3 emissions (the upstream carbon footprint of raw materials and the downstream emissions associated with the use and disposal of products) toward making plans and setting public goals to reduce them. The push to do this will come largely from the industry’s customers, which are demanding that suppliers rapidly cut all types of emissions,” C&EN says.

7. PFOA and PFOS regulations

It’s no secret that the EPA intends to study perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS) for regulations in 2022. If these two chemicals are designated as hazardous substances, funding for cleanup of these chemicals will be required at hazardous waste sites.

8. Plastic recycling

Climate change concerns are driving demand for more plastic recycling and improved methods.

“Conventional, thermomechanical recycling — in which old containers are ground into flakes, washed, melted down, and then reformed into new products — inevitably yields products that are more brittle, and less durable, than the starting material,” notes the Smithsonian Magazine. “At best, material from a plastic bottle might be recycled this way about three times before it becomes unusable. More likely, it will be ‘downcycled’ into lower value materials like clothing and carpeting—materials that will eventually be disposed of in landfills.”

These methods offer no reduction of plastic waste.

One process—depolymerization—breaks down plastics into monomers, their fundamental molecular building blocks, meaning a single plastic bottle can be recycled, good as new, indefinitely. While this enzyme-based recycling process may offer long-term answers, the industry must overcome cost and scalability issues, the Smithsonian adds.

9. TSCA implementation

The current Toxic Substances Control Act (TSCA) creates the following issues: “Delays in approvals of new, innovative chemistries; decreased U.S. manufacturing and innovation; branding chemicals as unsafe based on faulty science; considering burdensome, unwarranted workplace requirements that increase costs and deliver no additional worker safety; stifled innovation; and misguided market deselection for chemistries used to make essential products from building and construction materials to computers, healthcare, and clean energy solutions like batteries and solar panels,” states the ACC’s 2022 State of TSCA Report.

The ACC offers the following solutions to put the program back on track:

  • “EPA should return to its policy of deferring to other program offices and experts that are already better addressing air, water, and waste under other environmental statutes.”
  • “EPA should make safety determinations on a use-by-use basis at the end of the risk evaluation. For uses that ‘do not present unreasonable risk’ the process is then completed, and no further risk management measures are needed. Uses that are deemed to present unreasonable risk should proceed to risk management.”
  • “EPA should calculate risk to workers by taking into account actual exposures to workers. This means considering existing workplace controls that are either industry practice or requirements and PPE (personal protective equipment).”
  • “TSCA evaluations must be risk-based, based on real exposure scenarios, use scientific information provided by industry and stakeholders–for known conditions of use as the baseline case — and adhere to statutorily mandated TSCA science standards, and stop overestimating risk.”
  • In order to stop stifling innovation, “EPA must put forth a comprehensive plan to reform its processes to ensure the New Chemicals program meets its obligation to complete reviews within 90 days.”
  • “Recently, EPA significantly increased the amount it charges chemical manufacturers for risk evaluations of existing chemicals. … Good governance, fairness, and accountability require agencies to be good stewards of both public funds and fees paid for services. The forthcoming fee rule must result in improved implementation and adherence to the TSCA science standards and timelines.” This includes providing an accounting of the use of these fee funds.