Factors That Could Mar Chemical Industry Momentum

The chemical industry has gotten its mojo back on strength across major end-markets and an improving world economy. While chemical makers should benefit from strategic growth measures and investment on capacity expansion, the industry is still reeling under certain headwinds. There are a few reasons to be cautious about the chemical industry in the near term, which we have outlined below:

China Woes Linger

Slowdown in China -- a major market for chemicals -- remains a deterrent over the short haul. The world’s second-biggest economy remains plagued by persistent industrial overcapacity, weak property investment and rising corporate debt. In particular, ballooning debt levels (manifested by rising debt to GDP ratio) and rapid credit expansion have raised a red flag on the Chinese economy.

The country’s GDP expanded 6.7% in 2016, a deceleration from 6.9% a year ago, also the weakest annual growth in 26 years. The International Monetary Fund (IMF) annual report on the Chinese economy, issued a warning about the country’s surging debt level that has raised risks for a potential sharp decline in growth in the medium term. The IMF projects China’s GDP to grow 6.8% in 2017, moderating to 6.5% in 2018. Moreover, the Chinese government has set a GDP growth target of roughly 6.5% for 2017.

Capital outflow pressures, rapid credit expansion, continued reliance on stimulus measures and geopolitical uncertainties are among the key risks to the country’s economic growth. As such, a sluggish Chinese economy may weigh on demand for chemicals in this significant market.

Harvey-Stoked Disruptions Pose a Concern

Hurricane Harvey weighed on U.S. chemical production during the third quarter, knocking off a sizable chunk of production capacity. Harvey led to the shutdown of several chemical plants along the Gulf Coast -- the epicenter of the U.S. specialty chemicals and petrochemicals industry.

In particular, the storm ravaged Texas, which accounts for nearly three-quarters of the U.S. production of ethylene, which is among the world’s most important petrochemicals and a basic ingredient for final products ranging from plastic bottles to tires to polyester fabric. Many chemical plants producing ethylene are located near the Gulf Coast’s concentration of petroleum facilities.

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