INSIGHT: More US chem firms give up on H2 recovery

HOUSTON (ICIS)–So far in the earnings season, US chemical producers have given up on a second half recovery and will rely on their own actions to increase earnings while they wait for interest rates to fall.

US-based chlor-alkali producer Olin and specialty chemicals producer Eastman were the latest to abandon the prospect of a second-half recovery.

Excluding the effects of Hurricane Beryl, Olin expects the second half of 2024 to resemble its first half in terms of adjusted earnings before interest, tax, depreciation and amortization (EBITDA).

Eastman does not expect any improvement in primary demand in its key markets and geographies.

US-based paints and coatings producer Sherwin-Williams flat-out said that it did not expect to get any help from the market during the company’s second half. Improvements will have to come from within Sherwin-Williams.

Similarly, RPM International said it will rely on its margin achievement plan (MAP) to increase earnings in what it has called a no-growth and low-growth economy.

Such self-help measures led Evonik to raise its guidance even though it noted the absence of any broad-based macroeconomic recovery.

PPG lowered its full-year guidance because of lower auto production and uneven industrial production. However, PPG did break from the trend, in that it expected US economic activity to improve as the second half progressed. Growth should continue in Mexico.

In China, PPG said growth should continue for the company during the second half but at a slower pace. Demand in Europe is uneven but stabilizing.

Dow, meanwhile, expects a slower pace of recovery for some of its end markets for 2024.

In an interview with ICIS, Dow’s CFO said consumer durables and building and construction will likely remain weak through the rest of the year.

In North America, volumes for architectural coatings will not return to pre-pandemic levels until 2025, Dow said.

HIGHER INTEREST RATES HOLD BACK KEY CHEM END MARKETS
For many key chemical end markets, elevated interest rates continue to suppress demand.

The Federal Reserve has maintained the nation’s benchmark federal funds rate at a multiyear high of 5.25-5.50% as part of a campaign to lower inflation to its target of 2%.

The elevated federal funds rate has raised interest rates throughout the US economy, making big-ticket items like homes, automobiles, appliances and furniture more expensive.

The higher rates have had an additional effect on the existing home market. Consumers who have cheap mortgages are reluctant to sell their houses and assume a new 30-year loan with a much higher rate.

These homeowners are hanging on to their houses, and this trend has battered the nation’s existing home market, bringing sales to a 30-year low.

The slowdown in existing home sales has lowered demand for architectural coatings, furniture, mattresses and appliances.

For these end markets to recover, Dow said that 30-year mortgage rates need to fall to about 5%. Right now, they are at 6.78%.

SIGNS OF CONSUMER STRAIN
Sherwin-Williams noted some signs of strain among US consumers. It is not just inflation, which remains above the Fed’s target of 2%. They have depleted savings and taken on debt.

Business from insurance claims declined because consumers were reluctant to pay deductibles, the company said.

It noted weakness in its do-it-yourself (DIY) products sold to consumers through third-party retail stores. These customers tend to be more sensitive to price than those that shop at Sherwin-Williams’ paint stores.

Dow noted that sales to contractors were stronger than those to DIY consumers.

RPM also warned of uncertain DIY demand.

Companies outside of the chemical industry are also seeing signs of weakening consumer demand. The fast-food chain McDonald’s also noted consumer weakness. In the second quarter, global same-store sales fell by 1.0% and US same-store sales fell by 0.7%. The broadcaster CNBC said it was the first time that same-store sales fell since the fourth quarter of 2020.

McDonald’s said that consumers have become more careful about how they spend their money.

Real disposable incomes in the US barely grew in June following an increase of 0.3% the previous month. Growth in consumer spending also slowed down in June.

RATE CUTS BECOME MORE LIKELY
Consumers could get some relief in the upcoming months. The Federal Reserve could indicate that it is ready to start lowering the benchmark interest rate during its next meeting on 31 July.

Inflation is showing signs of falling to its target of 2%.

Many expect that the first rate cut will happen during the Federal Reserve’s meeting on 18 September.

The anticipation of future rate cuts would trickle through the economy and lower rates for mortgages and other forms of debt.

If the inflation continues to cool and if the Federal Reserve continues lowering rates, then mortgages could reach the 5% threshold that Dow said could lead to a sustained recovery for several key end markets.

MORE CHEMS SCHEDULED TO DISCUSS OUTLOOKS
Many more companies should reveal their guidance and outlook during the next two weeks as earnings season continues. So far, it looks like the industry will have to continue waiting for a sustained recovery.

Insight article by Al Greenwood

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