“I can’t think of another time in my 30 years working in the chemicals sector where there has been so many variables and so much uncertainty,” Mike Shannon, Global Chair, Chemicals & Performance Technologies at KPMG, says.
With a new administration about to take office and campaign rhetoric colliding with the challenges of making policy, there are questions wrapped in questions about what changes are on the horizon.
“In general, the feeling is that Trump will be better,” Shannon says. “What’s countering that sentiment is not knowing where his positioning is going to be on certain issues. Some may be pro-chemicals industry, others may be anti-chemicals industry.”
Here are some of the factors at play:
Climbing Oil Prices
Oil prices have been on the rise in recent weeks, which is great news for chemical manufacturers in the U.S.
When oil prices plummeted, it benefitted chemical producers in the EU, who use oil as a feedstock. With prices on the rise, chemical manufacturers in the U.S., who typically use natural gas, will become more competitive.
Months ago, OPEC agreed to cut production, which could help buoy prices for months to come.
Follow The Taxes
It’s no secret that many global companies, including chemical companies, design their business models to take advantage of lower tax jurisdictions overseas.
“They build a supply chain to maximize tax advantages where they can,” Shannon says.
Now, with Republicans set to take over Congress and the White House, there is already a new tax plan being floated around Capitol Hill.
According to CNBC, the current proposed formula would tax domestic revenue (minus domestic costs) at a rate of 20 percent — a sharp decline from the current corporate tax rate of 35 percent.
While the details of the proposal are still being hashed out, Shannon says that any change in the tax structure that benefits U.S. companies could be a boon for the chemicals industry.
“If the rules repatriating earnings to the U.S. are reduced, it will bring more investment to the U.S.,” he says. “There could be more M&A, or an increase in the creation of new facilities.”
Chemicals Could Hitch a Ride With The Auto Industry
On the campaign trail President-Elect Donald Trump vowed to impose high tariffs on car companies shipping jobs overseas. If the pressure to keep investments on home soil are successful — as it appears it has been in a few recent cases — it could ratchet up demand for chemicals in the U.S. as well.
“The auto industry is one of the sectors the chemicals industry is most reliant on,” Shannon says. “There are a lot of molecules in cars like carbon fiber, plastics, batteries, and other high value materials.”
The more active auto companies are in America, the higher demand will be for chemicals as well. Shannon says this could also help solve a potential glut in the industry from shale gas.
“We’ve had increased capacity being brought online from shale gas in the last four years, and that’s going to continue. The U.S. economy may not be able to absorb all of those chemicals, and then they have to be exported,” Shannon explains. “If there’s a resurgence in the auto industry, then that will immediately create a new market for those chemicals.”
For chemical industry execs trying to strategize what a Trump presidency means for their company, Shannon says the chemicals industry could be looking at a “perfect storm of opportunity in North America.”
However, he also pointed out that in some ways, it will be a “zero-sum game.”
“What benefits North America will have a negative impact in other markets around the world, which could result in higher prices, tariffs or transportation costs. And trade agreements are still completely unknown,” he says.
“Right now you’ve got to be thinking about all of these things that are happening on a global level and trying to take advantage of them as best you can,” Shannon advises.