Will North American manufacturing investment stall? How does this impact chemicals/materials producers?

Construction has begun on many previously announced manufacturing projects (see past post) – spending is up 71% in July 2023 from a year ago[1]. ?However, the North American manufacturing investment announcement boom appears to have ebbed since the end of 2022.?

The beginning – Tax cuts and tariffs

The US Tax Cuts and Jobs Act took effect in 2018 and reduced the top corporate tax rate from 35% to 21%. ?Also, in January 2018 an increase in US import tariffs began. Most companies took a year to start planning new investments to take advantage of the changes and new announcements rose mainly through 2019. ?While food supplies were considered secure, new investments were balanced across a diverse set of other industries until the Covid shutdowns starting in 1Q2020.

The shift - Pandemic and geopolitical events

The start of the pandemic not only delayed existing projects at the time, but also reduced new announcements. That changed within a year when supply chain security became apparent.? Investment shifted to supply chains in medical products, electronics, electric vehicles (EV), batteries, and plastic products (including for PPE).

Not only that, but there were significant new investment announcements in hydrogen/ammonia/methanol and solar/wind power, driven by ESG goals.? Ammonia investment got further support from the Russo-Ukrainian War, which restricted fertilizer exports from the region.

Interestingly, the announcements during this period featured advanced manufacturing principles[2], up to 15% by quarterly count, more than any time since 2018.? The average is back down to ~4.5% over the past year, reflecting more focus on bulk/scale commodities.

Selective boost - Government funding

The US CHIPS and Inflation Reduction Acts in 3Q 2022 so far primarily boosted solar and wind power supply chain investment announcements. Construction material and products, as well as industrial equipment investment announcements also rose.? EV/battery and hydrogen chain investment announcements also continued at high, but declining, levels since then.?

Meanwhile, petrochemical chain announcements have been fewer due to oversupply in key sectors like olefins and reduced margin expectations.

Demand impacts

Some impacts from the investment bubble include greater demand for materials in the construction of new plants, but also production demand for high value chemicals (e.g., in semiconductors).??

More critically, these manufacturing investments will likely lead to further waves of investment by secondary industries benefitting from re-shored critical parts (like semiconductors in a variety of consumer and medical products) and further progress in advanced manufacturing in North America.

EV/batteries are widely believed to be at the beginning of a steep S-curve and are generally expected to grow fast.? However, companies are concerned about unpredictable costs based on geopolitical supply chain risks and still to be settled government policies.?

Methanol and Sustainable Aviation Fuel (SAF) are likely to continue attracting some level of investment as they have “voluntary” support from downstream consumers.? For instance, companies with large air travel expenditures signing commitments with airlines or shipping companies ordering methanol-fuel capable vessels.

Hesitancy

Still, projects are taking longer to approve, and producers are holding cash.? While coming off a high, declining announcements are likely due to:

• Concerns on the ability to build capacity due to labor shortages and inflation
• Uncertainty about critical mineral supplies and supply chain security
• Sentiment of economic slowdown underway/ahead
• Need of a few Final Investment Decisions (FIDs) on energy transition projects to reassure additional investors
• Haziness of the “how” the IRA funding will work
• Uneasiness about the possible expiration in 2025 of the tax cuts related to the Tax Cut and Jobs Act
• Concerns about relatively higher capital costs now and versus oversees competitors (see previous post)

Path forward

With many potential future pathways, producers planning to participate in North American growth must:

• Conduct thorough, credible scenario planning
• Ensure highly competent feasibility assessments
• Align with the strongest and most innovative partners to enter new energy transition markets
• Partner with a strong, experienced design and build capability to ensure effective project and cost management

To keep ahead of the latest industry trends, see the monthly Advisian Market Perspectives Report.

Also, see Worley’s latest thinking here:?https://www.worley.com/our-thinking

Opinions are my own and not the necessarily the views of my employer.

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Sources:? GlobalData Construction; Advisian Market Services supplementary data and analysis. Apparent stalled or cancelled projects, as well as those under $25 million are excluded. Upstream energy, power and infrastructure projects are excluded from this analysis.

[1] FRED data

[2] Principles include use of digitalization, robotics, state of the art technologies, 3D printing, automation and other technologies