Will Trade Tussle Take a Bite Out of US Petrochemical Boom?

An image of a stock chart
Credit: Shutterstock photo

The shale gas revolution in the United States has been a huge driving force behind chemical investments in plants and equipment in the country. And currently, the U.S. petrochemical industry is in the middle of a shale-induced investment boom leveraging access to abundant and cheaper feedstocks. However, the escalating trade tensions between Washington and Beijing is expected to play spoilsport.

President Donald Trump, who has a record of attacking China for unfair trade practices, recently proposed sweeping tariffs on $50 billion of imports from China. The President's decision to levy tariffs on some 1,300 Chinese goods came after a 25% tariff on steel imports and a 10% tariff on aluminum imports slapped by the Trump administration that went into effect on Mar 23.

President Trump's protectionist actions enraged the Red Dragon with Beijing retaliating with plans of imposing tariffs on more than 100 American products with shipment values worth as much as $50 billion, bringing the world's two largest economies close toward a full-blown trade war.

China on Wednesday declared that it would levy additional tariffs of 25% on an array of U.S. products including soybeans, cars, planes, beef, corn, whiskies and chemicals. Notably, chemicals comprise roughly 40% of the products targeted by the planned tariffs. China had earlier slapped tariffs on about $3 billion worth of U.S. imports.

The Trump administration responded with a proposed $100 billion in additional tariffs on China yesterday, further intensifying the trade tussle between the two countries.

China's proposed countermeasures, if enforced, are likely to harm the U.S. chemical industry which is currently on an upswing.

Shale Bounty Fueling U.S. Chemical Investment

The U.S. Chemical Industry has clawed its way back from the devastation wrought by Hurricane Harvey and is set to ride the growth wave this year. According to the American Chemistry Council (ACC), a leading industry trade group, expects chemical production (excluding pharmaceuticals) to rise 3.7% in 2018 with capital investments on chemical projects are expected to play a key role in the growth.

A recovery in manufacturing, rising business investment and a rebound in domestic oil and gas production has set the stage for significant expansion and capital investment, per the ACC.

Major export markets such as Latin America and Asia are also expected to play a significant role in basic chemical production growth in 2018 and 2019. Strengthening export markets and increasing capital spending are also driving chemical demand across key end-use markets such as light vehicles and housing.

The United States remains an attractive investment destination for chemical investment and domestic chemical makers continue to enjoy the advantage of cheap ethane feedstock extracted from shale. This is driving investment in chemical production projects. Petrochemical makers are significantly expanding capacity in the country leveraging new supplies of natural gas.

New methods of extraction such as horizontal drilling and hydraulic fracturing (or fracking) are boosting shale production, bringing down prices of ethane (derived from shale gas) in the process.

The shale boom has incentivized a number of chemical companies to pump in billions of dollars for setting up facilities (crackers) in the United States to produce ethylene and propylene in a cost-effective way. Chemical makers including DowDuPont Inc. DWDP , BASF SE BASFY and LyondellBasell Industries N.V. LYB , Eastman Chemical Company EMN , Celanese Corp. CE and Westlake Chemical Corp. WLK are investing on shale gas-linked projects to take advantage of abundant natural gas supplies.

LyondellBasell currently sports a Zacks Rank #1 (Strong Buy). While both BASF and Eastman Chemical carry a Zacks Rank #2 (Buy), DowDuPont, Celanese and Westlake Chemical each have a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank stocks here .

According to the ACC, 320 new chemical projects have been already announced by chemical makers worth more than $185 billion, 62% of which is foreign direct investment. Such investments - many backed by Federal government support - are expected to boost capacity and export over the next several years. New capacity is expected to provide a boost to chemical production as these investments come on stream.

Chemical industry capital spending continues to go up, clocking $38 billion in 2017, per the ACC. This also accounts for one-half of overall construction spending by the manufacturing sector. The trade group expects capital spending to rise 6.3% in 2018 and 6.8% in 2019 and eventually reach $48 billion by 2022.

But Trade War Could Dampen U.S. Investments & Exports

The Trump administration's actions to impose heavy tariffs on steel imports and the threats of tariffs on U.S. chemical exports by China are detrimental to the U.S. chemical industry. These moves are expected to dampen new chemical investment in the United States, hurt U.S. chemical exports and harm the domestic chemical industry's competitiveness. All these may eventually lead to a slowdown in growth in the American chemical industry.

The steel tariffs would discourage chemical makers spending billions of dollars on new projects. These hefty tariffs will lead to a spurt in steel prices, which in turn, are likely to push up the costs of building petrochemical plants in the United States that use a significant amount of steel, thereby eroding the economic benefits of these projects. As steel costs constitute a significant portion of the costs of constructing these plants, this may discourage many companies from continuing their projects.

Notably, DowDuPont, which completed construction spending worth $6 billion in petrochemical projects along the U.S. Gulf Coast last year, had raised concerns that the tariffs on U.S. steel imports could add hundreds of millions of dollars in costs to its planned chemical project on the U.S. Gulf Coast.

Chemical industry groups have also expressed their discontent about the brewing trade war. The ACC recently said that China is among the most important trading partners of the U.S. chemical industry, importing 11% (or $3.2 billion) of all U.S. plastic resins last year. The trade group is worried that 40% of the products to which Beijing has assigned new tariffs are chemicals including polyethylene, polyvinyl chloride (PVC) and polycarbonates.

The ACC said that "engaging in a trade war with one of our country's most significant trading partners is not the answer. We strongly urge both the U.S. and Chinese governments to work together to come to a satisfactory and mutually beneficial decision before this situation escalates further."

According to the ACC, out of the announced investments by the chemical industry in new factories, expansions and restarts of plants across the United States, more than half of the projects are currently in the planning stage. The trade group is worried that the trade tariffs may force investors to consider doing business elsewhere.

China is one of the biggest export markets for U.S. chemicals and thus, leaves the American chemical industry heavily exposed to Beijing's planned retaliatory trade actions. The prospects of tariffs have created an uncertain demand environment for U.S. chemical products in this major market. This is worrisome as export markets are expected to significantly contribute to the growth of the U.S. chemical industry this year and the next.

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It's not the one you think.

See This Ticker Free >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

BASF SE (BASFY): Free Stock Analysis Report

Eastman Chemical Company (EMN): Free Stock Analysis Report

Celanese Corporation (CE): Free Stock Analysis Report

LyondellBasell Industries N.V. (LYB): Free Stock Analysis Report

Westlake Chemical Corporation (WLK): Free Stock Analysis Report

Dow Chemical Company (The) (DWDP): Free Stock Analysis Report

To read this article on click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos


    Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at

    Learn More