The rise of the US Dollar in the last twelve months has been something of anomaly. When pitted against an uncertain global economic backdrop such as economic turmoil in the Eurozone over Greece, amongst others, along with Japan struggling and ongoing concerns over Chinese economic growth, the reason of the rise of the American greenback currency is not so clear. However, others say this is not at all surprising with the US economy performing well – the IMF predicts that GDP growth will be at 3.1% this year – the rise of the currency becomes much easier to grasp.
In simple terms the mechanics of this are quite easy to decipher. With suggestions that US monetary policy may tighten in the future along with other central banks across the globe loosening or sticking to their policies, investors can make higher returns from dollar denominated assets. Thus inducing capital investment and boosting the value of the dollar. However, while this may be the upshot for those with dollar assets, American firms that sell abroad are hit. According to the Economist, about one quarter of the profits in the S&P 500 are earned in foreign currencies. This is a fact that has not been lost on some chemical producers in recent results releases. Matters are complicated further when one considers the issue of oil prices and how the subsequent decline of commodities linked to oil have eroded profit margins. All of this, against the uncertain global economic climate outlined at the start of this article.
However, we must ask the questions – what does this mean? How does it affect the chemicals markets?
The answer to both of these questions is somewhat of a double edged sword. By their very nature, chemicals are intrinsically linked to crude oil price and therefore any price fluctuations in the latter with affect the prices of the former. Therefore, we end up with challenging profit margins. For example, speaking on their Q2 results BP’s Chief Executive said “The external environment remains challenging…In the past few weeks oil prices have fallen back in response to continued oversupply and market weakness”. So on the one hand you have the issue of crude oil but then the added issue of the US Dollar also comes into play. If we take Sasol’s latest earnings release for example, the company notes whilst earnings increased, the group’s overall profitability was “adversely impacted by a 33% decline in average Brent crude oil prices…[but] this decrease was partly offset by a 10% weaker average rand/US Dollar exchange rate”. Thai chemicals producer, Indorama Ventures, also noted that the strong dollar aided their latest round of results despite a global economic concerns. It is clear here then that the strong dollar can have a large effect. On the other hand, the US specialty chemical producers, such Axalta and FMC, saw the strong dollar takes its toll on their earnings when foreign currency conversions made their unfavourable presence felt. In the petrochemicals world US based company’s such as Du Pont, Hunstman, Dow Chemical & LyondellBasell face some headwinds as Chemweek comments that ‘second quarter financials show US commodity and diversified chemical producers [are] benefitting from a recovering domestic market but [are] challenged abroad by the strong US Dollar”.
So the answer here is clear. The chemicals markets are no doubt affected by these factors and some are obviously more positive than others. However, against the backdrop of current global uncertainty it seems that most would argue that the march upward of the US Dollar is just one more worry to add to the office in-tray. If and when the Federal Reserve or other Central Banks being to change their monetary policies is the point at which this current status quo maybe be broken but it may be more welcome to some than others!