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Trump speech to congress short on specifics but ignites markets

Posted on March 3rd, 2017 by in Chemicals Industry News and Analysis

Trump

US President Donald Trump’s first speech to the joint session of Congress revealed little detail to his platform policy issues, but sparked a big rally in the US equity market on continued hopes for business friendly changes along with a change in tone directed towards compromise.

Most relevant to the US chemical industry are corporate tax reform, including a potential border adjustment tax (BAT); infrastructure spending; and rollbacks of regulations, including on energy development – all of which Trump touched upon.

On taxes, Trump alluded to a potential border tax or BAT without mentioning them by name.

“Currently, when we ship products out of America, many other countries make us pay very high tariffs and taxes. But when foreign companies ship their products into America, we charge them almost nothing,” said Trump.

A border tax would be a simple tax on all imports, essentially a tariff which would raise their cost. A border adjustment tax (BAT) could exempt US exports from taxes, while not allowing imported raw materials or cost of goods sold (COGS) to be deducted as an expense for tax purposes.

The BAT, which is being talked about in Congress, would incentivise companies to build plants in the US to export goods, and heavily penalize the use of imported materials.

This could have massive implications for chemicals and polymers supply chains where companies – and not just those in chemicals – would be highly incentivised to source local raw materials and eschew imports.

On trade protectionism, Trump quoted former president Abraham Lincoln, who early after his first election to Congress, warned that “abandonment of the protective policy by the American Government [will] produce want and ruin among our people.”*

Whether or not a protectionist tax regime would pass Congress is one thing, but we should fully expect a border tax or BAT to be proposed.

US CHEMICAL TRADE SURPLUS

The US chemical industry, excluding pharmaceuticals (all following data ex pharma), has a substantial surplus in global trade. This surplus amounted to $28.2bn in 2016, according to statistics compiled by the American Chemistry Council (ACC).

Mexico, the target of much of Trump’s talk on trade protectionism, is the second largest destination for US chemical exports ($19.2bn in US exports) behind Canada, and accounts for more than half of the total US trade surplus in chemicals ($14.6bn) – by far the most of any other country.

That represents a major risk in the event of retaliatory trade measures by Mexico, as well as other countries.

Purely from a tax standpoint, a US BAT would be a net positive for the US chemical industry, but a trade war would be very negative.

INFRASTRUCTURE PLANS

Trump also reiterated his commitment to a massive infrastructure plan, asking Congress to “approve legislation that produces a $1 trillion investment in the infrastructure of the United States, financed through both public and private capital, creating millions of new jobs.”

This is incrementally positive for the US chemical sector, and even more that the programme would be “guided by two core principles: buy American, and hire American,” he said.

That would favour US chemical companies or those with chemical plants in the US that would provide the polymers, coatings, adhesives, solvents and other materials used in the construction of critical infrastructure – from roads, bridges, railways and airports, to energy and telecom assets.

REGULATION ROLLBACK

On regulations, Trump reiterated his commitment to rolling them back to help US business. He recently directed federal agencies to create regulatory reform task forces to review which regulations to keep, change or slash.

The Trump administration also cleared the way for the construction of two major crude oil pipelines – the Keystone XL pipeline and the Dakota Access Pipeline.

Any rollback of regulations that promotes the development of more energy resources would be a benefit to the US chemical sector as well.

“The policy priorities President Trump outlined tonight will further the manufacturing renaissance made possible by the shale revolution and ensure the robust production of the fuel and petrochemicals that American’s rely on every day,” said Chet Thompson, president of the American Fuel & Petrochemical Manufacturers (AFPM).

The US equity market reacted favourably to Trump’s speech, with the broader market represented by the S&P 500 rising 1.4% on 1 March, the day after.

Chemical stocks, as part of the industrial group, did much better, with notable gains for Ingevity (+5.7%), Tronox (+4.4%), Westlake Chemical (+4.3%), Trinseo (+3.8%), Olin (+3.7%), Chemours (+3.2%), OMNOVA Solutions (+3.2%) and LyondellBasell (+2.9%).

On the infrastructure theme, Ingevity’s asphalt paving chemicals likely gained the attention of investors.

Whether or not Trump’s business friendly policies are actually implemented, it certainly will be a long road to getting them done.

* Lincoln’s actual quote was a bit longer: “Believing that these propositions, and the [conclusions] I draw from them cannot be successfully controverted, I, for the present, assume their correctness, and proceed to try to show, that the abandonment of the protective policy by the American Government, must result in the increase of both useless labour, and idleness; and so, in pro[por]tion, must produce want and ruin among our people.”  Source: Collected Works of Abraham Lincoln, Volume 1

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All opinions shared in this post are the author’s own.

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