The chemical industry may be signaling a recession, says expert

A major — though little talked about — industry may be flashing a recessionary warning.

“The chemical industry is the litmus test for the global economy,” Paul Hodges, founder of New Normal Consulting and author of Boom, Gloom and the New Normal. “We see almost all relevant industries and sectors.”

Chemicals go into almost everything, from computer screens to furniture and automobiles.

Hodges points out the price of petrochemicals have come down considerably from their 2021 peak. The decline, says Hodges, indicates demand destruction, and therefore a slowdown in major industries like electronics, cars, and housing.

Take for example, ethylene, a substance derived from oil or natural gas. The industrial chemical is used for everything from fabricated plastics, to antifreeze, to insulations.

Ethylene prices in the U.S. decreased by about half over over a one-year span. It went from 61 cents in April 2021, to around 30 cents per pound just last week, according to Polymerupdate, a petrochemical data intelligence platform.

Hodges says a year ago chemical buyers were over-ordering amid rampant inflation and supply chain issues, so as to not run their plants out. Some may have paused buying certain chemicals if other components that go into an end product weren't available.

Hodges says by the fall, “buyers just pulled back. When we talked to them, what they were saying was, 'Well, actually, I've got a lot of inventory.'"

Stubbornly high energy prices and the war in Ukraine have all contributed to the price volatility in chemicals and the industries connected to them.

Hodges believes Europe is in the thick of a slowdown amid an energy shock. China is also slowing amid recent lockdowns.

“We think this is going to be a very deep recession, because we are nowhere near the bottom of it yet, “ said Hodges.

Analysts have been slow to call out a recession, with some indicating the probability in 2023 or 2024. Hodges believes the chemical industry, as a leading indicator, is telling a different story.

“We can't be at the bottom because 80% of the market doesn't think we're in a recession yet.”

Ines is a markets reporter covering stocks for Yahoo Finance. Follow her on Twitter at @ines_ferre

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