Mixed Forecast for Chemicals This Year

Written by Jim Blaze, Contributing Editor
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KCS chemical train. Photo: Jim Allen/FreightWaves.

Staring into the 2021 abyss, the outlook for rail-hauled chemical traffic looks like a mixed weather forecast: “Early morning fog, changing to overcast skies, with a high-pressure system moving in later for sunny skies.” The fundamental assumption is that the COVID-19 pandemic will gradually abate as immunization shots take hold.

Basic chemicals production appears to have dropped by about 1.3% during 2020. However, the leading chemical associations saw a statistical recovery under way as 2020 entered the second half of the year.

In terms of volume change from 2020, the broad 2021 chemical market outlook for the U.S. should see basic overall chemical production rising by about 5%, with some chemicals increasing at a lower 3.6% or so range.

There are some positive railway equipment and logistics notes from 2020 chemical sector traffic. Plastic resins movement was a growth chemical segment overall in 2020 due to the role it plays in producing COVID-19 protective materials. Some chemical products that support automobile manufacturing are also recovering strongly. Plastics are a big input to automotive. From 2015 through 2019, automotive units averaged nearly 17 million per year. Sales during 2020 are expected to have come in at only 14.4 million units. The outlook for 2021 is perhaps 16 million units.

There are a few of strategic unknowns about the chemical railroad logistics sector as we enter 2021. Here, as a reference, is the recent year’s trending of chemicals over several major railroad networks:

For the level of confidence in 2021, let’s turn to consultants and rating agencies for their views.

Deloitte recently expressed its outlook for the chemical and related petroleum and gas industry. Deloitte believes there is a transition under way as to supply and prices for oil and natural gas across Canada and the U.S. Will the rich flow of natural gas remain as a relatively inexpensive feedstock for the chemical industry. While most seem to think it will, there is a level of uncertainty as 2021 rolls out toward a five-year or longer horizon. There is also a competition issue from other providers, like the Middle East. 

Might the recent surge in building new chemical facilities in the U.S. suggest a potential overbuilding of petrochemicals capacity? The Biden Administration might simultaneously impact the outlook for chemicals and therefore the rail freight chemical outlook.   

On a positive note, Deloitte suggests a reshifting of the U.S. chemistry business model to a growth in rail-served recycled and renewable feedstock-based polymers. 

Various rating agencies also follow the chemical industry. A November 2020 Fitch Ratings business review suggests there is some uncertainty. Fitch does forecast overall growth prospects throughout broad chemical sectors. However, there is some uncertainty because of the continued social distancing and coronavirus issues as 2021 begins. That seems reasonable. After all, wide general population distribution of the COVID-19 vaccine might not occur until the mid- to late second quarter. Optimistically, an increase in certain packaging and health care product uses may improve those chemical-related market sectors a bit faster.

If the chemical industry turns fiscally conservative and seeks to preserve corporate liquidity and strong free cash flows, that might lower volume recovery. If the chemical market recovery pace slows, that could translate to a slow recovery in new tank car orders and also a more conservative addition to the covered hopper car fleet. Fitch Ratings does not seem to be projecting a conservative approach by the chemical companies or their customers. It is simply stating an obvious open question. Of course, there could be an upside if the chemical companies decide to strengthen their warehousing capabilities by increasing the rail fleet use as a mobile warehouse network. 

My rail market outlook:

  • Slow new tank car order recovery into the second half of 2021.
  • Increased pace of backlogged tank car deliveries into the second half.
  • Gradual increase in new orders for covered hopper cars for plastics.

Yes, the momentum for increasing railroad chemical traffic should continue in 2021.

Independent railway economist, Railway Age Contributing Editor and FreightWaves author Jim Blaze has been in the railroad industry for more than 40 years. Trained in logistics, he served seven years with the Illinois DOT as a Chicago long-range freight planner and almost two years with the USRA technical staff in Washington, D.C. Jim then spent 21 years with Conrail in cross-functional strategic roles from branch line economics to mergers, IT, logistics, and corporate change. He followed this with 20 years of international consulting at rail engineering firm Zeta-Tech Associated. Jim is a Magna cum Laude Graduate of St Anselm’s College with a master’s degree from the University of Chicago. Married with six children, he lives outside of Philadelphia. “This column reflects my continued passion for the future of railroading as a competitive industry,” says Jim. “Only by occasionally challenging our institutions can we probe for better quality and performance. My opinions are my own, independent of Railway Age and FreightWaves. As always, contrary business opinions are welcome.”