gasworld Business Intelligence investigates how the Chemical Activity Barometer relates to the US industrial gases business.

What is the Chemical Activity Barometer?

The American Chemical Council (ACC), the founders of the Chemical Activity Barometer (CAB), note that the chemical industry produces materials that are used very early in the US supply chain, so by monitoring various indicators in the chemical industry, it is possible to identify more general economic events months in advance. The CAB has an average lead of 8 months, meaning that any significant peak or trough in the index, will likely be replicated but the US economy around 8 months after.

The CAB is generated by compiling various indicators such as production and prices for selected chemicals, such as chlorine, pigments and plastic resins, in addition to other indicators such as hours worked in the chemicals sector, chemical company stock data, end-user industry sales-to-inventories, and building permits.

Current performance

The CAB surpassed pre-recessionary levels for the first time mid-way through 2016. Between January and February 2017, the CAB has posted year-on-year monthly growth of between 4% and 5.8%. However, since August, year-on year growth has been slowing, coming in at 2.3% in September.

The ACC noted that in September, production indices faltered chiefly due to the effects of Hurricane Harvey. The US gulf coast is home to much of the country’s chemical production, and the Hurricane did cause some plants to temporarily shut down. Despite this, there were strong increases in product prices, chemical related share prices and also inventories.

CAB Sept 17

Source: American Chemical Council

How does the CAB relate to the US industrial gases business?

Whereas industrial gas companies are themselves chemical companies, they are also a major supplier to the general chemical sector. In the US, roughly 11%, or $2.2bn, of the total industrial gases business ($20bn) is generated through the sale of hydrogen, nitrogen, carbon monoxide and other gases to the US chemical sector.

Chemical clients often require substantial volumes of gases, so it is normally more efficient to produce these gases at a facility located at the customers site, or alternatively nearby, then delivered via pipeline. All the major industrial gases companies supply the chemicals sector in the US via onsite plants. Air Products, Air Liquide and Praxair also operate vast pipeline networks around the US Gulf Coast that supplies the chemicals industry with hydrogen, carbon monoxide, oxygen and nitrogen.

Industrial gases are not only used in the manufacture of chemicals, they are indeed used throughout the US supply chain. Therefore, the industrial gases business generally follows the same trends as industrial production and GDP. Consequently, the CAB can be used as a relatively accurate short-term forecasting tool for the US gases business.

Business plan and finance series

This is the sixth in a series of articles from gasworld Business Intelligence that gets behind some of the business plans, accounting measures and indicators of the major industrial gas companies, and the industry itself.