Chemicals sector must brace for a rise and fall under Trump presidency

Donald Trump’s second presidency that begins on 20 January is likely to have mixed impacts on the chemicals sector. In the short term, we expect expansionary fiscal policies to boost consumption and investment, driving up chemical production as downstream manufacturers increase purchases to meet rising demand. However, over the long term, higher input costs, increased US gas exports and elevated interest rates stemming from these policies are likely to exert downward pressure on chemical output.

Gains in the short term

We expect that fiscal expansion under the Trump administration will provide a boost to industrial production in the short term. Trump’s plan to extend the 2017 Tax Cuts and Jobs Act (TCJA) and its expiring personal tax provisions will boost consumer spending and business investment. These policies will boost demand for key downstream sectors such as automotive and construction. Because these are key consumers of chemicals, this will prop up the chemicals sector.

In addition, a near-term downgrade to commodity prices should lower input costs since both oil and gas are important feedstocks to chemicals. US oil production is currently running close to capacity, so a dramatic increase in domestic production would need to involve the controversial exploration of federal land. As a result, we have not included this in our baseline forecast. However, Trump’s slogan of “drill baby drill” is clearly an upside risk to US production. We have therefore lowered our oil price forecast as we think investors will view this as a downside risk to prices (see Chart 1).

Chart 1: Crude prices to fall on expectations of increase in domestic production

Trump’s trade and energy policies: a firm headwind

We expect a second Trump administration to lift the moratorium on LNG gas exports. This should narrow the margin between EU and US natural gas prices: we have revised down our European gas price and nudged up our US price since the election (see Chart 2). Since gas is a key feedstock to chemicals production, this could erode the longstanding competitive advantage of US chemical production over its European counterparts. However, European gas prices will still be more than 2.5 times higher than those in the US by the end of the decade, which means that the impact of this policy will only chip away at US competitiveness at the margin.

Chart 2: Premium on European gas prices versus the US set to narrow

In our baseline, we assume most US tariff actions are targeted at sectors without clear links to US chemicals: German and Japanese cars; Canadian dairy ; steel and iron from various countries—with those countries retaliating in kind. The only tariffs that would have a direct impact are on China, where we assume blanket tariffs that include chemicals, and where retaliation could cover US chemicals exports to the US. However, US chemicals exports to China account for only 4% of US chemicals gross output.

Chemicals sector subject to shifts in demand by its customers

The more important impact of President-elect Trump’s policies is what that they will do to the sectors that consume chemical products.

Other key downstream sectors, such as construction, will be hit by higher interest rates and possible labour shortages due to Trump’s immigration policy. However, not all manufacturing sectors will take a hit from Trump’s policies. For example, US tariffs will shield the automotive industry, a key downstream sector to the chemicals sector, from global competition. We expect production in the automotive industry to increase, boosting demand for products from the paints and varnish subsector.

Using weighted averages, we are able to model how Trump’s return to office is likely to impact demand for US chemicals. Chart 3 highlights how growth in demand from key downstream sectors, illustrated by the dashed lines, has become less stable following Trump’s re-election. In the short term, demand for chemical goods will be higher compared to our pre-election forecast as fiscal expansion props up industrial production. However, output will quickly fall from 2028 onwards as demand weakens from higher prices caused by tariffs and higher interest rates put in place to tackle inflation.

Chart 3: Impact of tariffs on demand for chemicals to increase over time

Overall, we expect the chemicals sector to benefit in the short run from Trump’s re-election but face challenges over the longer term. Fiscal expansion will boost downstream demand, trickling up the supply chain to support chemical goods. Additionally, Trump’s pro-drilling stance could lower oil prices as markets anticipate increased supply, reducing production costs for chemical producers who rely on oil as a key feedstock. However, in the long term, increased natural gas exports, tariffs, immigration curbs and higher interest rates are likely to weigh on the sector. Rising natural gas exports may elevate domestic gas prices, increasing input costs. Simultaneously, tariffs, immigration restrictions and higher interest rates—put in place to tackle rising costs resulting from tariffs—could dampen downstream demand for chemical goods, ultimately suppressing demand for chemical products.

---

To learn more about our December industry forecasts and how we factor in the influence of Trump 2.0 policies, download our report.

To discover how we can support you to navigate uncertainty with confidence, request a free trial.

---

Subscribe to our newsletters

Subscribe to our newsletter to get our insights straight to your inbox. Additionally, you can check ‘Talk to us’ box to have our team contact you about a free trial of our services and how we can support you.