Supply Chain Squeeze

Trying to predict demand for domestic chemicals in 2022 and beyond

Welcome to the November Specialty Chemicals Issue of the newsletter. If you have no idea what specialty chemicals are then start here. I’m not 100% sure if I’ll keep writing about specialty chemicals here, but there are some things that have been on my mind recently about supply chains. This is mostly going to be written from my own experiences though, I’ll try and provide some links to sources if I can find them. This is mostly just my thoughts based on my experiences and do not reflect the views of my sponsors or my employer.

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The chemical industry doesn’t get a lot of news coverage. There is no beat reporter for the New York Times or Wall Street Journal that is covering this stuff, probably because no one really cares as long as things are moving and prices are low. If you’ve been reading the news lately then you know that our global supply chains have been disrupted, significantly, but I really view this as a snowball that maybe started about 5 years ago in China. The snowball is too big to ignore now.

The cost of production is low in China and it’s not because “labor is cheaper.” The cost of production in China has historically been low for a number of reasons, but a big reason is because the environmental protections around what can be dumped into the water or landfilled were not as stringent there as it was here in the United States or Europe. I wrote about this a little bit previously, but I suspect that raw materials that were being exported out of China were so low because the cost of responsibly disposing of waste or byproducts from production were non-existent. This changed five years ago. 

In China, a major campaign against environmental violations has so far penalized more than 30,000 companies and over 5,700 officials. Central government inspection teams have coordinated with multiple local government agencies in sweeps covering 30 provinces and regions. - Peter Corne and Johnny Browaeys for The Diplomat, December 2017

The other thing I remember happening around this time was that Chinese producers of shipping containers required that the anticorrosion coating be a waterborne coating. I remember this because when I was at Hexion our plants were at capacity in China pumping out waterborne epoxy resin coatings. I think we were even shipping stuff from Texas to China because the demand was so high. By requiring a very specific coating technology the Chinese government did two things: 

1. They improved working conditions and air quality 

2. They constrained the production of shipping containers

All of these moves by China were important for improving air, water, and soil quality within China. These are things that make me happy because it’s the right thing to do for the environment, but they also mean that companies that were major polluters or could only do solvent borne coatings needed to invest a significant amount of capital to improve operations. Companies had to install waste water treatment plants or just close down all together. This either took capacity offline and/or delayed delivery of goods and services.

Chinese factory workers are now getting paid more than ever: Average hourly wages hit $3.60 last year, spiking 64 percent from 2011, according to market research firm Euromonitor. That’s more than five times hourly manufacturing wages in India, and is more on par with countries such as Portugal and South Africa. - Sophia Yan, CNBC

Further, wages started going up in China back in 2017, which is also good news for the people who work in the factories. This was bad news for conglomerates who relied on the low cost of labor. This started the movement of some production leaving China to lower wage countries such as Vietnam, but the advanced manufacturing required for computer chip production stayed. China is still reliant on outside design and suppliers themselves in this area even in 2021.

If this all sounds somewhat complicated, things became more complex with the US-China trade war. This resulted in goods not being shipped between the two countries due to increased tariffs. You might be thinking, “but how does this relate to chemicals and polymers?” Good question. Remember that the majority of our built world is also reliant on chemicals and polymers of some sort. 

• Got some new granite countertops? They get sealed with a polymeric coating. 

• Want to buy a new car? They need computer chips, paint, composites, adhesives, and tires

• Want to build a house? Oriented strand board is held together with a polymer and the roofing underlayment beneath the shingles are polyolefins and/or have a polymeric adhesive holding it to the plywood. Even the shingles use a polymer in the glass mat that holds the asphalt.

I could go on and on, but the American Chemistry Council does a better job of explaining the importance of polymers and plastics for the enablement of everyday modern life here in the US and the rest of the world. A lot of chemical supply chains are very local i.e. it’s not efficient to ship bulk containers of chemicals across the ocean, but the things that those chemicals might go into are of higher value do get shipped all over the world.

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What Does The Future Look Like?

So in summary up to about early 2020 the structural damage to our fragile global supply chains was significant. China, once viewed as a sort of “factory for the world,” and the globalization that resulted from this thinking is really a thought of the past. 

“In the past, there would be one massive plant in China for the whole world. But that globalisation is gone,” says CY Huang, a Taiwanese investment banker and adviser on a number of deals which have contributed to disentangling global supply chains from China. “It will be more costly, and it will be less efficient. But it is the way that politics is pushing us.” 

“The past model, where [manufacturing] is concentrated in just a few countries like a world factory will no longer exist,” Young Liu, Foxconn chairman, said at a conference in June. “What we think is more likely in the future are regional production networks.” -Kathrin Hille for Financial Times

I haven’t seen any news about new factories being built in the US, but this may push production to other low cost labor countries and as a result the chemical industry might also eventually follow their customers. The way that shipping costs and lack of available shipping containers are headed to me indicates that domestic production in the US, while costly, might not be as costly as we think when accounting for transportation costs, especially the hidden carbon costs of shipping things across the ocean.

Joe Biden’s trillion dollar infrastructure bill was also signed so I think we can further expect demand to remain high or perhaps even increase as those programs get off the ground. If we want to repave roads, build better energy grids, and repair our bridges then we are going to need polymers, plastics, and specialty chemicals to make the dream a reality. 

Do I think we will completely reorder the way the world does business in the next few years? No, I don’t think it’s going to be as drastic as that, but I do think that we will see some resilience built into our supply chains moving into the future. I would expect more domestic demand for chemicals moving into 2022 and beyond as new capacity is built for the customers of the chemical companies. If we have a recession though due to interest rates getting increased then all bets are off.

Tony