The US chemical industry has had a tough profit season

A number of US chemical companies reported weaker-than-expected full-year and fourth-quarter results last year, with profit growth struggling to keep up with rising costs, according to Icis Inc. 's website.

HB Fuller, a leading global supplier of adhesives, sealants, glues and other specialty chemicals, reported fourth-quarter and full-year 2022 earnings below its September 2022 guidance. Although ExxonMobil's profit in the fourth quarter of 2022 increased significantly compared to the same period last year, the fourth quarter profit from chemicals was $250 million, which was down sharply both year-on-year and sequentially, and the full year profit from chemicals was also down sharply compared to the previous year. In addition, the paint and coatings industry in the United States also reported weaker demand for its profits.

Demand in the construction market is weak

Comus Corp., a maker of high-performance titanium dioxide and fluorochemicals, said higher costs and weak seasonal demand led to lower-than-expected earnings for 2022. Another titanium dioxide producer, Teno Corp., said a fire at one of its plants and flooding at two mines affected its fourth-quarter 2022 earnings.

In early 2023, RPM International reported its first year-over-year earnings decline in five quarters in the fourth quarter of 2022. The company mainly produces paints, coatings, adhesives and sealants. The company's shares fell more than 2% after the statement.

Fuller Corp said a sharp drop in demand for construction adhesives led to lower-than-expected fourth-quarter and full-year 2022 earnings.

Slowing demand has knock-on effects

RPM International said that as supply chains improved, some customers did not rush to purchase its products because they thought they could get supplies in a timely manner, leading to lower demand for its products. The company is adjusting its own inventory and reducing productivity at some of its plants, but it could take six to nine months to adjust inventories to its desired levels and expects the decline in demand to continue for some time.

The Atlanta Fed said businesses in its region planned to return to just-in-time inventory management, rather than maintaining the high inventory levels seen during the pandemic. The Fed region includes Georgia, Florida, eastern Tennessee, and southern parts of Mississippi and Louisiana.

Manufacturers in the Richmond Fed region indicated that some customers were reducing inventory levels due to concerns about lower demand. The Fed region includes Virginia, Maryland, North Carolina and South Carolina.

Profit margins are squeezed

Exxon's chemicals business earned $250 million in the fourth quarter of 2022, compared with $800 million in the third quarter, partly because of the opening of several new plants.

In addition, Kevin Swift, chief economist at Icis, predicts the U.S. will enter a relatively mild recession in 2023. The economic downturn will make it harder for US chemical companies to pass on rising costs. If demand for chemicals falls, it will be harder for US chemical companies to boost margins.

However, there are opportunities for US chemical companies to turn to the Chinese market, which could be opened by a rebound in demand from the Chinese economy. The US Inflation Reduction Act will fund domestic infrastructure projects, semiconductors, renewable energy and electric vehicles, which will also boost demand for chemicals and plastics. A manufacturing reshoring trend is already under way, with US companies looking to move production capacity closer to their domestic end markets to avoid future supply chain disruptions caused by natural disasters, pandemics or geopolitical tensions.