However, several macroeconomic indicators signal uncertainty in the global economy heading into the coming year: volatile energy prices, higher costs, and fracturing of trading patterns amid geopolitical tensions.
Global inflation. Globally, inflation has been a major concern, which has led to aggressive central bank policies to raise interest rates. For instance, the US Federal Reserve has increased rates by more than 300 basis points to control inflation, and other central banks are taking similar action.3 Given the global nature of the industry, weaknesses in key markets such as China may well have a sizable impact, given industry reliance on those markets and the reciprocal nature of trade.
Continued weakening of GDP growth. Slowing GDP growth in China is possible—Q2 2021 was near 1.5%, but Q2 2022 fell to between –2.5% and –3%, primarily due to the zero-COVID approach and lockdowns.4 These developments are having a ripple effect on demand, particularly as US chemical consumer prices have risen in line with inflation. For instance, the Bureau of Labor Statistics and the American Chemistry Council (ACC) chemical price index currently stands at 101.7, compared to 119.5 in 2020.5
Falling consumer confidence. The EU consumer confidence index has fallen from a pre-pandemic level of 104 to 97 in the second half of 2022.6 Multiple Europe-based producers cited in their Q2 earnings results that they expect further market decline. In other regions, end-market demand is also weakening. For example, sales in the US automotive industry were down from 18.8 million in April 2021 to 13.8 million in July 2022,7 partly due to supply chain issues such as the chip shortage. But as energy and food prices have risen, consumer spending is expected to slow.
Oil price volatility. Russia’s invasion of Ukraine drove oil prices to new highs. The Brent price averaged $107 per barrel in the first half of 2022, significantly above the $65 per barrel average for the prior-year period,8 impacting the financials of several global chemical producers. While oil prices have softened somewhat in the third quarter of 2022 due to reduced demand and economic concerns, the impact of this price volatility will continue to be felt.
Tight global gas markets. In the first half of 2022, spot prices at the Dutch Title Transfer Facility (TTF)—the central gas trading hub in continental Europe—averaged €99/ MWh. This compares to €22/MWh a year earlier.9 With volumes to Europe via Nord Stream only at 20%10 over much of the summer and reduced to zero in the fall, prices have remained high. In the United States, average natural gas prices at Henry Hub almost doubled in the first half of 2022 compared to the prior year—from $3.40 per million British thermal unit (MMBtu) in H1 2021 to $6.41 per MMBtu in H1 2022.11 In August, Henry Hub prices neared $10/MMBtu for the first time in years. And the spot LNG benchmark for North Asia, the Japan-Korea Marker, was $52 per MMBtu in July 2022, more than triple the level in July 2021.12
Impact on feedstock dynamics. With limited incremental OPEC+ (a group of 23 oil-exporting countries that meets regularly) supply, the economics of sales of discounted Russian crude to Asian buyers could shape the economics for Naphtha-based olefins. This situation has not yet fully cascaded into trade balances in the flow of polymers globally. Two specific watch points for H2 2022 that will inform feedstock prices in 2023 will be the natural gas supply situation in the EU through the winter and the ability of OPEC+ to expand supply. Either of these could significantly alter feedstock economics, causing a ripple effect through the chemical value chain.
Climate change. The growing impact of climate change and the regulatory response have been highly evident in 2022. For instance, the summer heat and drought in Europe, the United States, and China, as well as the unseasonably heavy floods in several countries, have created significant economic disruption. These events have affected the industry, as industrial operations in Sichuan, China were shuttered, and several European waterways dramatically reduced shipping. The impact of extreme weather is compounding already tenuous and stretched supply chains.
These headwinds will continue into the coming year, meaning chemical executives will have to find the balance between addressing immediate challenges and positioning for growth amid longer-term economic and consumer trends. How companies strike this balance will make 2023 a pivotal year setting the stage for the coming transformation of the chemical industry. Will this upcoming year be a “rebound” or a “reset” for the industry?