What are the key challenges and opportunities for the US Consumer Chemicals sector?

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What are the key challenges and opportunities for the US Consumer Chemicals sector?

Hello! Thanks for your question about the key challenges and opportunities for the US Consumer Chemicals sector.

OVERVIEW

The short version is that the US Consumer Chemicals sector has an almost balanced share of opportunities and challenges. However, the opportunities have managed to exceed the challenges.

One of key challenges involves unfavorable brexit sentiments of key industry players like Kurt Bock, Chairman of BASF (one of America's and the world's biggest consumer chemicals research firms). Secondly, the rising cost of the US Dollar, which makes US exports expensive in foreign markets (this is especially important since most of the consumer chemicals produced in the USA are exported). Another key challenge is the rising activism and consumer preference for environmentally-friendly products.

On opportunities, the US consumer chemicals sector has seen growth due to mergers and acquisitions (M&A), according to Plunkett Research. The research firm PwC recommends 3D technology and precision Agriculture (which is beginning to make serious inroads in the sector) as vital to productivity and growth. In their own words, "leveraging new technologies in ways that bring your company closer to its customers is going to be a significant source of value for the industry in the coming years."

Fallen prices of crude oil and natural gas has favorable outlook for US manufacturers of chemical products, especially ethylene-based plastics.

Below you will find a deep dive of my research/findings along with all the details for how I came to this answer.

METHODOLOGY

I conducted an extensive search and reviewed authority and industry research/statistics databases. I also looked into information provided by databases of the US government. Next, I read through and carefully verified authority media reports, industry websites, associations and individual company websites to get authentic and verifiable information on the key challenges and opportunities for the US Consumer Chemicals sector.

CURRENT ISSUES AFFECTING THE SECTOR

1. Consumers' Environmental Concerns
Consumer concerns and environmental activism about packaging have come to the fore. Plastic grocery and shopping bags have become evil in the eyes of some. In the U.S. alone, plastic bags are about a $4 billion industry. In America and elsewhere, bags to a growing extent are seen as a big burden to landfills and an even bigger eyesore in the form of litter. Recycling is modest at best. Various answers are being developed.

Biodegradable bags would be welcomed by many consumers, even if they drove up costs a bit, and reusable string, nylon or canvas bags are very much in vogue. Paper bags are now more easily available, and they are clearly biodegradable. More than two dozen U.S. cities have proposed or legislated bans on the use of plastic bags.

Future growth of the chemicals industry will be driven by developing markets, where gains are likely to range from 6 to 10 percent, compared with 2 to 3 percent in developed economies. Global chemicals companies have been trying hard to tap into this booming business, but most have found themselves losing in a head-to-head rivalry with local players, for both supply and demand reasons.

2. Brexit
Another key challenge is brexit. In an article published March 7, 2016 by Chemical and Engineering News, BASF Chairman Kurt Bock states “I can think of many different reasons why it would be bad”. In this statement, the BASF Chairman is referring specifically to the negative impact on the US consumer chemicals sector.

3. US Dollar
A strong US dollar is hurting U.S. Trade. On the morning of June 24, 2016, the U.S. dollar quickly rallied against the British pound, up 6.3%. This was the biggest one-day gain since 1967, according to FactSet, a financial data firm. A strong dollar makes a company's products more expensive and less attractive to buyers outside the U.S. Therefore, a stronger dollar typically lowers U.S. exports. The U.S. manufacturing sector, which relies heavily on trade, fell into a 5-month recessionin 2016, triggered by the strong dollar. Following suit, manufacturing lost a net 39,000 jobs in the past 12 months.

Besides Germany, the U.S. is the world’s top exporter of chemical goods. In 2012, chemical exports were worth 188 billion U.S. dollars. Most of this was generated through exports to the Asia-Pacific region. Top countries of destination were Canada, Mexico and China.

FURTHER CHALLENGES FROM RESEARCH

According to PwC’s research, 64% of consumer chemicals CEOs agree or strongly agree that that their company's prospects are faced with more headwinds in 2015 than in 2013, and that the trend is likely to continue in 2016 and beyond. These CEOs express concern that the effect of these headwinds will significantly impact their markets, technology and resources. Some other headwinds of the consumer chemicals industry include:
- Demand slowdown in the target downstream markets;
- Emerging technology breakthroughs creating cheap product substitutes in the downstream;
- Emergence of low-cost players;
- Emergence of new channels.

The consumer chemical industry faces some major external threats. The same research from PwC claims that company executives from consumer chemicals sector identified 3 main factors that will affect the wider stakeholder expectations of business within the consumer chemical industry from 2015 to 2020. These are:
- Resource scarcity and climate change: 68%
- Technology advances: 66%
- Shift in global economic power: 65%

Executives across the sector are pushing aggressively for cost-reduction. The most voted restructuring activities that consumer chemical company executives want to implement in the 2016/2017 are:
- Cost-reduction initiative: 71%
- Enter into new strategic alliance or join venture: 42%
- Complete a cross-border Merger & Acquisition: 31%

OPPORTUNITIES

1. Decline in Prices of Oil and Gas
The consumer chemicals industry benefits from the decline in prices of crude oil and natural gas: The dramatic declines in the price of crude oil and natural gas succeeded in reducing costs for much of the chemicals industry, especially for firms in petrochemicals.

In many cases, these reduced costs have been passed on to end users. The global chemicals industry was estimated to total about $4.7 trillion in revenues in 2015, according to Plunkett Research estimates. In the U.S., consumer chemicals generated about $800 billion in revenues in 2015. U.S. plastics and rubber industry revenues were $235.1 billion in 2014, according to the Bureau of the Census.

2. Strength of Demand
Long terms trends show that demand for American consumer chemicals is strong. The strength of the automobile industry in the U.S. will remain one of the most positive factors in chemical demand, as will relatively strong demand for paint and other building materials used in new U.S. construction. Long-term trends point to increasing demand for many types of chemical products.

Growing demand for consumer and convenience products, such as processed foods and beverages, is enhancing demand for plastic packaging on a worldwide basis. Makers of many components in major commercial and consumer products are switching to plastics due to the durability, light weight and long life of plastic.

3. Mergers and Acquisitions
Studies showed that mergers and acquisitions are profitable for business in the US consumer chemicals sector. A recent study by Deloitte Touche Tohmatsu Ltd. found that global chemical industry mergers and acquisitions soared from $15.9 billion in value during 2009 to $77.8 billion in 2014.

Many of today’s acquisitions are driven by a desire to pick up companies that manufacture higher-profit margin specialty chemicals.

4. Industry Growth
The industry growth indices shows significant promise of a brighter future, in spite of the executives’ fears and worries. Data drawn from the Bureau of Labor Statistics comes handy here:

- The sector has shown continued increase in employment numbers since 2012, and has shown strong monthly growth from January through May 2016. Average unemployment in this sector remains at 3.6% as at May 2016.

- Earnings and hours of all employees has also increased, indicating growth in the industry. Earnings have gone from $30.46 to $31 .58. And earnings and hours of production and non-supervisory employees have increased from $21.73 to $22.53

- On average, the lowest paid wage earners are paid as much as $14.73 per hour. This is nearly two times the minimum wage in the USA.
- Industry productivity index has also grown from 93.865 in 2012 to 94.148 in 2016.

5. Changes in Other Industries
Market and industry changes in other industries, like in food processing, benefits the consumer chemical sector. Makers of many components in major commercial and consumer products are switching to plastics due to the durability, a light weight and long life of plastic. As industry leader BASF puts it, “In brief, plastics will be the material of the 21st Century.” Global consumption of plastics is now nearly 300 million metric tons yearly.

SUMMARY

The US consumer chemicals sector is fraught with significant challenges, but greater opportunities. Key challenges include Brexit dampening growth expectations held by key decision makers in the industry, the emergence of low cost players in emerging markets posing significant competition for US exports, a high cost of the US dollar makes US consumer chemicals expensive for exports, and activism and consumer preference for environmental friendliness stirs up drastic technological changes in the sector.

It's not all doom and gloom. The sector has experienced increased value from mergers and acquisitions, $15.9 billion in value during 2009 to $77.8 billion in 2014. In spite of environmental activism, the industry is also seeing high demand for consumer chemicals such as plastics, with global consumption at 300 million metric tons yearly. All available data supports future growth of the US consumer chemicals sector. These positives should assuage any fears of possible revenue declines or negative industry shifts.

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