OUTLOOK FOR CHEMISTRY AND THE ECONOMY

16 October 2018Michigan Chemistry Council

Lansing, MI

Martha Gilchrist MooreSr. Director – Policy Analysis and Economics

Presentation Overview

MacroOutlook

Key End Use Markets and Chemicals

Tariffs and Trade

0

1

2

3

4

5

6

2015 2016 2017 2018 2019 2020 2021 2022 GDP Trade Volumes Industrial Production

% growth

Global Deceleration after 2018

Source: ACC Survey of Forecasters

-20-15-10

-505

101520

05 06 07 08 09 10 11 12 13 14 15 16 17 18OECD CLI+6 Global Industrial Production Global Trade

The OECD CLI + 6, Global Industrial Production, and Global Trade

% Y/Y Change (3MMA)

Source: OECD, various national statistical agencies, ACC analysis

• Going into the end of 2018, global economic expansion remains resilient. Data through Q2 shows solid growth across many countries.

• World economic growth expected to edge higher to 3.2% in 2018. Expansion continues into 2019 with growth of 3.0%.

• Monetary tightening in most economies (except China), but still accommodative.

• Growth in global trade volumes peaked in 2017. Even without recent trade tensions, trade easing as global expansion matures.

Global Macroeconomic Situation

But, risks are intensifying• Oil prices rising• Rising trade tensions and protectionism are major threat.• Emerging markets remain under pressure; U.S. dollar is

strengthening and interest rates rising• Potential crisis in Turkey

Longer term, underlying demographics and disruptive technologies reshaping global economy.

Global Macroeconomic Situation

• Q2 growth surged on higher investment, consumer spending, and trade.• Moving into H1, positive momentum from inventories, spending, and

investment• Growth across multiple sectors in U.S. economy • Vehicle sales slowing, but remain robust (17.0 million in 2018; 16.8 million

in 2019)• Housing starts continue slow climb hampered by shortages of materials and

labor (1.33 million in 2018; 1.39 million in 2019)• Confidence high among consumers and businesses• Tax reform and budget act providing stimulus• Business investment rising• Manufacturing growth expanding; energy production reaching new records

U.S. Economy Continues to Accelerate

• Tightening labor market; wage growth accelerating• Inflation and wage growth firming Fed tightening• U.S. recovery/expansion is now the 2nd longest in post-war period• U.S. GDP growth of 2.9% in 2018 and 2.6% in 2019• Key risk from trade tensions – higher cost of imports; retaliation

against U.S. producers

U.S. Economy Continues to Accelerate

Outlook for End-Use Markets

Chemical Activity Barometer (CAB)

• Developed by ACC, the CAB is a leading indicator of broader industrial activity.

• CAB accelerated in September (following flat growth in August)

• Key production and inventory indicators remained positive

• CAB suggests further growth in business activity through the end of 2018

-25-20-15-10

-505

101520

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Recession Industrial Production Chemical Activity Barometer

% change Y/Y

Source: ACC

Housing and Vehicles Outlook

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2

4

6

8

10

12

14

16

18

20

05 07 09 11 13 15 17 19 21

2016: 17.5 m2017: 17.2 m2018: 17.0 m2019: 16.8 m2020: 16.6 m2021: 16.8 m

Millions of Units (SAAR)

0

500

1,000

1,500

2,000

2,500

05 07 09 11 13 15 17 19 21

2016: 1.17 m2017: 1.21 m2018: 1.28 m2019: 1.38 m2020: 1.36 m2021: 1.41 m

Housing Starts (thousands)

Sources: Census Bureau, ACC Survey of Economic Forecasters Sources: Bureau of Economic Analysis, ACC Survey of Economic Forecasters

0102030405060708090

100

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Europe North America South America China Other Asia/Pacific Rest of World

Millions

Global Light Vehicle Sales by Region

Sources: OCIA (International Association of Motor Vehicle Manufacturers), Wards Intelligence

Vehicle Ownership per 1,000 People

0 100 200 300 400 500 600 700 800 900

United StatesCanadaPacific

Europe, WestEurope, East

BrazilCentral & South America

Asia, Middle EastChina

Asia, Far EastIndonesia

AfricaIndia

2005 2015

Source: Transportation Energy Data Book (Oak Ridge National Laboratory)

• In the U.S. more than $3,500 of chemistry in every light-vehicle (including 342 pounds of plastics and composites)

• More than 1 billion cars on the road today (plus 400 million trucks), doubling by 2040.

• Majority of growth coming from emerging economies• Disruptive technologies reshaping vehicle supply chain• Transition to electric vehicles• Requires broad expansion of road infrastructure

Key trends in Global Motor Vehicle Growth

Outlook for End Use Markets in U.S. (Consensus)

Source: ACC (October 2018)

US Recoveries/Expansions in HistoryDuration in Months

0 20 40 60 80 100 120 140

October 1949 - July 1953May 1954 - August 1957April 1958 - April 1960

February 1961 - December 1969November 1970 - November 1973

March 1975 - January 1980July 1980 - July 1981

November 1982 - July 1990March 1991 - March 2001

November 2001 - December 2007Average

June 2009 - ?????

Sources: NBER and ACC analysis

Outlook for Energy & Chemicals

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

86

88

90

92

94

96

98

100

102

104

Balance (right) Production (left) Consumption (left)

Global Oil Supply and Demand

18Source: EIA Short-Term Energy Outlook (October 2018)

-2.0-1.5-1.0-0.50.00.51.01.52.02.53.03.5

2013 2014 2015 2016 2017 2018 2019 2020OPEC Other Non-OPEC United States Russia Canada North Sea China World

Million barrels per day

Incremental Change In Oil Production

19Source: U.S. Energy Information Administration

U.S. Becomes Leading Energy Producer

0

2

4

6

8

10

12

14

94 96 98 00 02 04 06 08 10 12 14 16 18

Mill. Barrels per Day (BPD) Bill. Cubic Feet (BCF) per Day

45

50

55

60

65

70

75

80

85

90

3

4

5

6

7

8

9

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12

13

94 96 98 00 02 04 06 08 10 12 14 16 18

Mill. Barrels per Day (BPD)

U.S. Net Imports of

Crude Oil and Petroleum Products

Source: EIA Short-Term Energy Outlook (August 2018)

Resulting in Surging Ethane Supply and Ethane Exports

0.0

0.5

1.0

1.5

2.0

2.5

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Ethane Domestic Demand Ethane Net Exports

Million Barrels per Day

Sources: U.S. Energy Information Administration and ACC analysis

Shale-Advantaged Chemical Industry Investment

Nearly $202 billion in new projects

68% is foreign direct investment

31%

22%

41%

6%

Complete Under ConstructionPlanned Delayed/ Uncertain

As of September 2018

-1

0

1

2

3

4

5

6

7

1997-17(average)

2018 2019 2020 2021 2022 2023

Chemicals (exc. pharm) Basic Chemicals Specialties Agricultural Chemicals Consumer Products

% change

US Chemistry Accelerating

US Basic Industrial Chemical and Synthetic Materials Production Outlook by Segment

70

80

90

100

110

120

130

Total Inorganic Organic Synthetic Materials

Production Index (2012=100)

Source: ACC Mid-Year 2018 Situation & Outlook

Year Total Inorganics OrganicsSyntheticMaterials

2016 1.6% -0.3% 2.9% 0.6%

2017 0.6% -7.1% 3.1% 0.6%

2018 2.8% -0.4% 1.5% 4.4%

2019 4.7% 3.5% 5.7% 4.3%

2020 3.9% 2.1% 5.0% 3.9%

2021 3.0% 1.6% 3.8% 2.9%

U.S. Specialty Chemicals

• With improved manufacturing growth in U.S. and abroad and recovery in oilfield & mining, specialties production surged in 2017, up 6.3%.

• Looking ahead, 4.6% growth expected in 2018.

• Strong manufacturing and mining sectors have boosted demand for specialty chemicals in 2018 with the largest YTD gains in: oilfield chemicals; electronic chemicals; cosmetic chemicals; corrosion inhibitors; flavors & fragrances; plasticizers; plastic addtives; biocides; coatings; foundry chemicals; and adhesives & sealants. -20

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-10

-5

0

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15

05 07 09 11 13 15 17 19 21

% change Y/Y

Source: ACC Mid-Year 2018 Situation & Outlook

U.S. SPECIALTY CHEMICALSLONG TERM OUTLOOK

-1 0 1 2 3 4 5 6 7

Electronic ChemicalsOilfield Chemicals

Plastic CompoundingPlastic Additives

PlasticizersFlame Retardants

AntioxidantsCorrosion Inhibitors

Paint AdditivesBiocides

Rubber ProcessingCatalysts

Water Mgmt ChemicalsFood Additives

I&I CleanersAdhesives & SealantsFlavors & Fragrances

Historical (2012-17)

Future (2018-22)

% growth per year

Average Annual % Change

Year-over-Year

Segments with Slow Growth ProspectsPigments, 1.4Cosmetic Additives, 1.2Coatings, 1.1Foundry Chemicals, 1.1Lubricant Additives, 1.1Construction Chemicals, 0.7Dyes, 0.5Mining Chemicals, 0.3Paper Additives, 0.2

Segments ContractingPrinting Inks, -0.6Textile Specialties, -1.0

Thoughts on Trade

• USCMA

• SEC 232:• ALUMINUM & STEEL• AUTOS & AUTO PARTS

• SEC 301:• US-CHINA TRADE

• WTO

U.S. Trade Actions and Trade Partner Retaliation

U.S. Trade Actions and Trade Partner Retaliation

USMCA

Sec 301U.S.-China Trade

Sec. 232 TariffsAluminum & SteelAutos & Auto Parts

WTO

• Strengthened Rules of Origin• 75% value regional content (up from 62.5%)• Strong content requirement for core parts (i.e., transmissions and engines)• Labor value content requirement – 40-45% must be produced by workers earning at

least $16/hour• Strengthened ROO for auto parts• New rules phased in over 2-5 years (in line with model design lead times)

• Interstate Dispute Settlement Mechanism (ISDS) mechanisms preserved• New ISDS only covers investments in Mexico in certain sectors• Prevents any member from entering into a free-trade agreement with a “non-

market” economy, i.e., China.• Strengthens intellectual property protections

• Dairy and agricultural market access

U.S.-Mexico-Canada Agreement (USMCA)

IMPACTS

U.S. SECTION 232 TARIFFSALUMINUM & STEEL

Due to U.S. Tariffs on Imports:…increased costs to maintain and expand capital… direct impact to chemical plant maintenance and construction costsinvestments put on hold and/or cancelled; particularly painful consequences to projects in progress

…increased cost of essential inputs into downstream productsdecline in demand for U.S. chemicals decline in U.S. chemicals production, lost jobs, offshoring, investments put on hold and/or cancelled

Due to Retaliation on U.S. Exports: $3.5 B in chemicals exposed to retaliatory tariffs decline in U.S. chemicals production, lost jobs, offshoring, investments put on hold and/or cancelled

Tariffs on exports of downstream chemistry-containing productsdecline in demand for U.S. chemicals decline in U.S. chemicals production, lost jobs, offshoring, investments put on hold and/or cancelled

$3.5B U.S. Chemicals & Plastics

Exports exposed to Retaliatory Tariffs

U.S. SECTION 301 TARIFFSON US-CHINA TRADE

AND CHINESE RETALIATION

Aug 2017

U.S investigation into unfair trade practices by Chinese initiated

Mar 2018

Commerce releases findings that China is conducting unfair trade practices related to technology transfer, IP, and innovation

April 2018

U.S. announces 25% tariffs on 1,300 Chinese products, 2 lists: $34B + $16B

July 6 2018

U.S. tariffs on $34B (no chemicals) imposed; Chinese tariffs on 545 products (no chemicals)

July 102018

U.S. announces 10% (or 25%!) tariffs on $200B, 6,000 products (1,505 chemicals)

July 202018

U.S. threatens tariffs on up to $505B (basically ALL imports from China)

Aug 32018

Chinese tariffs on $60B announced (987 of 5,207 products are chemicals)

Aug 23 2018

U.S. tariffs on $16B imposed (includes $2.2B chemicals); Chinese tariffs on $16B imposed (includes $2.0B in chemicals/ plastics)

Late Sept/ early Oct

U.S. tariffs on $200B ($16.4B chemicals) likely imposed; Chinese tariffs on $60B expected includes $8.8B in chemicals and plastics

$11B U.S. Chemicals & Plastics

Exports exposed to Retaliatory

Tariffs

ECONOMIC IMPACT OF US-CHINA TRADE WAR

Source: Oxford Economics, 8/23/18

25% tariffs on US$50 B

+10% tariffs on

US$200B*+

Response from China that causes equivalent impact -1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

GDP level (cumulative), difference from baseline, %

2018

2019

2020

ChinaU.S. World*note it could be 25% tariffs

on US$200B

Eurozone