US Chemical Giants Give Up on Mid-Year Economic Recovery Dream, Bet on Internal Strategies to Face 5% Interest Rate Challenge

In recent times, multiple US chemical companies have taken on a pessimistic outlook for the economic recovery in the second half of the year, and are instead relying on their own strategies to bolster profitability. While anticipating interest rate cuts from the Federal Reserve, these companies are actively adjusting their business strategies to address market challenges.

Olin Corporation and Eastman Chemical Company, as leading producers of chlor-alkali and specialty chemicals in the US, have both announced abandoning their forecasts for an economic rebound in the second half. Olin expects that even excluding the impact of Hurricane Beiier, its adjusted EBITDA for the second half of 2024 will remain flat compared to the first half, without any significant growth. Eastman Chemical has also stated that the demand conditions in its major markets and regions are not expected to improve in the second half.

Similar views have been expressed by Sherwin-Williams, a major US paint and coatings company, and RPM International. Sherwin-Williams explicitly stated that the market environment in the second half is unlikely to provide additional help for companies, and profit improvement will need to rely on internal measures. RPM International emphasized that it will rely on its internal profit enhancement plan to address the challenges of a "zero-growth and low-growth economic environment".

Additionally, PPG Industries, a leading US coatings manufacturer, had previously lowered its full-year profit guidance, citing declining automotive production and weak industrial output. The company also announced that it will strive to break through the expectations and achieve profit growth through its own efforts.

Dow Inc. has also taken a cautious stance on the pace of recovery in certain end markets, anticipating that the recovery in 2024 will continue to slow. Its Chief Financial Officer pointed out that durable consumer goods and the construction industry may remain weak for the remainder of the year. Dow further stated that the demand for architectural coatings in North America may not recover to pre-pandemic levels until 2025.

US chemical companies generally believe that the timing of the Federal Reserve's interest rate cuts is now too late to boost the market in the second half. The continued rise in interest rates has persistently suppressed the demand in many key chemical end-markets. Currently, the Fed plans to maintain the benchmark federal funds rate at 5.25% to 5.50%, a multi-year high, to achieve its 2% inflation target. This has led to an overall rise in US interest rates, pushing up the prices of big-ticket items like houses, cars, appliances, and furniture. The high interest rates have placed additional stress on the US housing market, as consumers with low-cost mortgages are unwilling to sell their properties and instead take on higher-rate 30-year new loans. This trend has severely impacted the US existing home sales market, which has dropped to the lowest level in 30 years. The slowdown in existing home sales further reduces the demand for construction coatings, furniture, mattresses, and appliances.

Dow stated that for these end-markets to recover, 30-year mortgage rates need to drop to around 5%. However, the current rate stands at 6.78%. Sherwin-Williams observed that US consumers are showing signs of financial strain. In addition to inflation remaining above the Fed's 2% target, consumers have depleted their savings and are burdened with debt. Insurance claim business has also declined, as consumers are unwilling to pay deductibles.

Sherwin-Williams also noted that the DIY (do-it-yourself) product market sold through third-party retail stores is performing weakly, as these consumers are more price-sensitive. In contrast, Dow indicated that sales to contractors have outperformed DIY consumers. RPM International also warned that DIY demand is uncertain due to the economic downturn.

Looking ahead in the coming months, US consumers may see some relief. The Federal Reserve has recently hinted at being prepared to start lowering the benchmark rate, as inflation has shown signs of declining towards the 2% target. The market widely expects the Fed to implement its first rate cut at the September 18th meeting. The anticipation of future rate cuts will permeate across the entire economy, lowering mortgage and other debt interest rates. If inflation continues to cool and the Fed maintains its rate cuts, mortgage rates may reach the 5% threshold. Dow stated that this could drive sustained recovery in some key chemical end-markets. However, for US chemical companies, this prospect is now decoupled from their near-term operating conditions in the second half of the year.