THE AGE OF UNCERTAINTY:A GLOBAL ECONOMIC OUTLOOK

23 September 2019

Pine Chemicals Association

Vancouver, BC

Martha Gilchrist Moore

Sr. Director – Policy Analysis and Economics

Presentation

Overview

Near-Term Outlook

Longer-TermDemand Trends

Trade Tensions

Near-Term Outlook

Europe 37%

North America

29%

Japan 14%

OtherAsia-

Pacific5%

LatinAmerica

4%

Africa & Middle East

3%

India China

1% 5%

Former Soviet Union

(FSU)2%

Shifting Center of Gravity: Chemical Demand

China 38%

Europe 17%

North America

16%

Japan 5%

OtherAsia-Pacific 10%

Africa & Middle East

4%

India2%

LatinAmerica6%

Former Soviet Union (FSU)

2%

20181989

176%

105%

84%

67%

48% 42% 40% 39%32% 32% 32% 31% 31% 30% 30% 29% 29% 29% 25% 23% 20% 20% 18% 15% 14% 12%

200%

180%

160%

140%

120%

100%

80%

60%

40%

20%

0%

% of GDP from Exports

Relative Importance of Trade

Source: Oxford Economics

Global Economy Has Lost Momentum

• Trade volumes slowing affecting most economies (some more than others)

• Labor markets deteriorating across the globe

• Inflation remains relatively low

• Short-term investment outlook is poor

• Banks increasingly risk averse, despite looser financial conditions

• Consumer spending lower across many economies

• Global manufacturing in recession; industrial production expected to grow just 1.5% in 2019 before recovering to 2.5% in 2020

• GDP forecasts lowered for many key economies

• Global GDP forecast lowered to 2.7% for 2019 (slowest rate since 2009) and 2020

• Increasing downside risks

Increasing Uncertainty in U.S. and Global Outlooks

Occurrences of the word “uncertainty” in Federal Reserve Beige Book

35

30

25

20

15

10

5

0Jul 18 Sep 12 Oct 24 Dec 5 Jan 16 Mar 3 Apr 17 Jun 5 Jul 17 Sep4

'18 '18 '18 '18 '19 '19 '19 '19 '19 '19

Source: Federal Reserve

Global Economic Policy Uncertainty Index

Source: Scott Baker, Nick Bloom, and Stephen J. Davis

2017 20222018GDP

2019Trade Volumes

2020 2021Industrial Production

% growth5

4

3

2

1

0

Global Economy Slows in 2019

Source: ACC Survey of Forecasters

53

52

51

50

49

48

47

46

45

44

A reading above 50 indicates expansion, while a

reading below 50 indicates contraction

PMIs Suggest Downturn in Global Manufacturing

9Sources: Institute for Supply Management, JP Morgan, IHSMarkit

20

15

10

5

0

-5

-10

-15

-2094 96 02 16 1898 00

OECD CLI+6

04 06 08 10

Global Industrial Production

12 14

Global Trade

The OECD CLI + 6, Global Industrial Production, and Global Trade

% Y/Y Change (3MMA)

Sources: OECD, various national statistical agencies, ACC analysis

• Longest economic expansion on record (122 months), but momentum is slowing; U.S. is at or near peak in business cycle

• 2018 boost from fiscal stimulus has faded; investment growth decelerating

• Uncertainty created by tariffs and trade situation are exacerbated by weak demand abroad

• Confidence waning, but remains relatively high

• Labor market still strong; but starting to slow

• Consumer spending still solid on continued gains in employment and real wages

• Fiscal cliff in 2020 likely avoided

• Two rate cuts and more cuts likely; dollar appreciating

• GDP growth of 2.4% in 2019 and 1.9% in 2020

U.S.: Still Resilient, but Slowing

Global Economic Outlook

% Change in Real GDP

Sources: BEA, OECD, IMF, author’s estimates

World USA UK Euro Area Japan Brazil Russia China India

2016 2.5 1.6 1.8 2.0 0.6 -3.3 0.3 6.7 8.2

2017 3.2 2.4 1.8 2.4 1.9 1.1 1.6 6.8 7.2

2018 3.1 2.9 1.4 1.8 0.7 1.1 2.3 6.6 7.1

2019 2.7 2.4 1.2 1.1 0.9 1.5 1.3 6.1 6.7

2020 2.7 1.9 1.2 1.3 0.4 2.2 1.8 5.8 7.1

2021 2.8 2.0 1.9 1.3 1.0 2.0 1.9 5.1 6.9

End-Use Industry Outlook: Advanced Economies

< 10%

-10% - -2%

-2.0% - 0.0%

0.0% - 1.0%

1.0% - 5%

5% -10%

>10%

2017 2018 2019 2020 2021 2022 2023

Oil & natural gas extraction

Aerospace

Food, beverages & tobacco

Construction

Coatings

Agriculture

Machinery

Wood & wood products

Electronic components

Textiles, leather & apparel

Motor vehicles & parts

Paper

Printing & recorded media

End-Use Industry Outlook: Emerging Markets

2017 2018 2019 2020 2021 2022 2023

Food, beverages & tobacco

Construction

Wood & wood products

Machinery

Agriculture

Coatings

Textiles, leather & apparel

Printing & recorded media

Paper

Motor vehicles & parts

Electronic components

Oil & natural gas extraction

Aerospace

< 10%

-10% - -2%

-2.0% - 0.0%

0.0% - 1.0%

1.0% - 5%

5% -10%

>10%

Global Semiconductor Sales

$45

$40

$35

$30

$25

$20

$15

$10

$5

$0-50

-30

-10

10

30

50

89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

3-Month Moving Average of Sales (right) % Change Y/Y (left)

Source: Semiconductor Industries Association

Billion

Europe North America South America China

India Japan Other Asia Pacific Rest of World

Millions

1009080706050403020100

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Global Light Vehicle Sales by Region

Sources: OCIA (International Association of Motor Vehicle Manufacturers), Wards Intelligence, Oxford Economics

Global Chemical Capacity Utilization

% of Capacity (3MMA)

100

95

90

85

80

75

70

89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

Source: American Chemistry Council

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%180

160

140

120

100

80

60

40

20

0

Production Index (2012=100)

Growth of Global Chemical Industry

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23

% change Y/Y (right axis) Production index (left axis)

Sources: ACC, Oxford Economics

U.S. SPECIALTY CHEMICALS LONG TERM OUTLOOK

Electronic Chemicals

Oilfield Chemicals

Plastic Compounding

Plastic Additives

Plasticizers

Flame Retardants

Antioxidants

Corrosion Inhibitors

Paint Additives

Biocides

Rubber Processing

Catalysts

Water Mgmt Chemicals

Food Additives

I&I Cleaners

Adhesives & Sealants

Flavors & Fragrances

Historical (2013-18)

Future (2019-23)

% growth per year

-1 0 1 2 3 4 5 6 7

Average Annual

% Change

Year-over-Year

Segments with Slow Growth Prospects

Pigments, 1.4

Cosmetic Additives, 1.2

Coatings, 1.1

Foundry Chemicals, 1.1

Lubricant Additives, 1.1

Construction Chemicals, 0.7

Dyes, 0.5

Mining Chemicals, 0.3

Paper Additives, 0.2

Segments Contracting

Printing Inks, -0.6

Textile Specialties, -1.0

Longer-Term Trends

25

20

15

10

5

0

-51985-90 1990-95 1995-2000 2000-05 2005-10 2010-15 2015-20 2020-25

Global North America Europe Japan China India Latin America Africa & Middle East

Average growth % per year

Chemical Production Growth

• Population

• India and China currently account for nearly a third of global population

• India will become the world’s most populouscountry over the next decade

• Rising Middle Class

• Increasing Urbanization

• Sustainability

• Infrastructure

• Digitalization/technology

Drivers for Long-Term Rising Chemistry Demand

100%

80%

60%

40%

20%

0%China India

Middle Class Share of Population

2020 2050

40%

20%

0%

60%

100%

80%

China India

Urban Share of Population

2020 2050

Trade Tensions

400

350

300

250

200

150

100

50

0

500450400350300250200150100500

2014 2015 2016 2017

Trade Balance (right)

2018

Exports (left)

2018 YTD 2019 YTD

Imports (left)

$ millions

U.S. Pine Chemicals Trade

U.S. Chemistry Exports to the World

Embedded chemistrycontent of other

exported goods,$49.3

Direct chemical

exports, $140.2

$ billions

$200

$180

$160

$140

$120

$100

$80

$60

$40

$20

$0

Trade Conflict Slowing Global Growth

• Tremendous uncertainty on trade: USMCA, Section 301, retaliation from Section 232, and others

• Escalating tariffs and trade tensions between the U.S. and other trading partners (esp. China) is taking a toll on the broader global economy

• Tariffs are a tax and raise costs

• Trade volumes lower, especially in emerging Asia

• Creating headwinds for investment and hiring as firms cannot anticipate demand and costs

• Continued tariffs and trade war has already cut into growth. Escalation will further cut growth prospects

• Significant impact on U.S. chemicals-directly and indirectly

• Updates and replaces 25-year old NAFTA agreement

• Continues reciprocal zero tariffs on more than 11,000 goods imported into U.S.

• Promotes greater regulatory cooperation and streamlined ROOs

• Expands access to agricultural markets in Canada and Mexico

• Includes minimum wage mandates, environmental provisions, guarantees against foreign expropriation of U.S. property, greater intellectual property rules, gender discrimination guidelines, and support for the free flow of data between countries

• USITC expects USMCA to add 176,000 jobs and growth the economy by$68 billion

• Concerns remain regarding duty-drawback and ISDS

USMCA

• In 1975, India was named a beneficiary developing nation under GSP, aU.S. trade preference program

• Nearly 2,000 products (including auto parts, textiles) were allowed to enter the U.S. duty-free

• India was the largest beneficiary of the program with $5.7 billion in imports in 2017.

• In May 2019, after determining that India was not providing “equitable and reasonable access” to its markets (in addition to other criteria), theU.S. withdrew GSP status for Indian imports.

• The Coalition for GSP estimates it will cost U.S. businesses an additional$300 million in tariffs and could disrupt investment

• India has retaliated with higher tariffs on 28 U.S. products ($1.4 billion)

Removal of GSP Status for India

• Citing unfair trading practices and lax intellectual property protections, initial action on washing machines and solar cells in February 2018

• Tit-for-tat escalation now includes all of imports from China with tariffs of up to 30% on $250 billion of imports

• By December, additional tariffs on 10% to 15% tariffs on the remaining$300 billion of imports, including consumer goods (mobile phones, toys, computers, etc.)

• More than $24.8 billion of chemicals/plastics imports affected

• In addition, the Administration has requested that U.S. companies stop doing business with China

• Lost in the noise: importers of components/supplies not easily sourced elsewhere and consumers (~$1,000/year according to JP Morgan)

Section 301 Tariffs

List,

Effective Date

Date

ImposedU.S. SECTION 301 TARIFFS

ON IMPORTS FROM CHINA

CHINESE RETALIATORY TARIFFS

ON IMPORTS FROM THE U.S.

$50B Tariff

Action

(Lists 1 & 2)

7/6/18,

8/23/1825% tariffs, increase to 30%

10/15/19$1.8B Chemicals/Plastics

25% tariffs on $50B imposed$2.0B Chemicals/Plastics

$200B Tariff

Action (List 3)

9/24/18,

5/10/19,

10/15/19

10% tariffs initially, increased to

25% tariffs May 2019, increase to30% 10/15/19$12.9B Chemicals/Plastics

5%, 10%, 20% and 25% initially,

now 20% and 25% tariffs on $60B imposed

as of 6/1/19$9.0B Chemicals/Plastics

Proposed

$300B Tariff

Action (List 4)

9/1/19

List 4a15% tariffs$5.1B Chemicals/Plastics

5% and 10% tariffs$0.1B newly listed Chemicals/Plastics

12/15/19

List 4b15% tariffs$5.1B Chemicals/Plastics

5% and 10% tariffs$0.7B newly listed Chemicals/Plastics

Cumulative $488B$24.8B Chemicals/Plastics

$110B$11.8B Chemicals/Plastics

U.S. SECTION 301 ANDRETALIATORY TARIFFSON US-CHINA TRADE

SUMMARY

Sec. 301 Tariffs on Pine Chemicals

HTS Code HTS DescriptionChinese Tariff

List

Chinese rate

on U.S. ExportsUS Tariff List

U.S. Rate on Chinese

ImportsDate Imposed

3803 Tall oil, whether or not refined List 3, Annex 4 5% List 3 10% initially, raised to

25% May 2019, (proposed

increase to 30% on

10/15/19)

9/24/2018

3804 Residual lyes from the

manufacture of wood pulp,

whether or not concentrated,

desugared etc., including lignin

sulfonates, but excluding tall oil

List 3, Annex 4 10% List 3 10% initially, raised to

25% May 2019, (proposed

increase to 30% on

10/15/19)

9/24/2018

3805 Gum, wood or sulfate turpentine

etc. from coniferous woods;

crude dipentene; sulfite

turpentine etc; pine oil with

alpha-terpineol predominating

List 3, Annex 4 25% List 3 10% initially, raised to

25% May 2019, (proposed

increase to 30% on

10/15/19)

9/24/2018

3806 Rosin and resin acids and

derivatives therof; rosin spirit

and rosin oils; run gums

List 3, Annex 4

List 4, Annex 2

5%-25% List 3 10% initially, raised to

25% May 2019, (proposed

increase to 30% on

10/15/19)

9/24/2018 &

12/15/2019

3823.13 Tall oil fatty acids List 3, Annex 4 5% List 4a 15% 9/24/2018

(China)

9/1/2019 (U.S.)

Summary

• Uncertainty remains a key theme in 2019

• While there no clear signs of impending global recession, the global economy is experiencing slow growth and low inflation

• Trade tensions are disruptive and harmful to just about all involved

• Outlook is for modest recovery in 2020 and 2021

• Longer-term, economic center of gravity will continue to shift anddifferent patterns of growth to underlying demographic trends andevolution of economic structure

• Many challenges and opportunities ahead for pine chemical producers

For Further Information

Please feel free to address questions to:

Martha Gilchrist Moore

Senior Director – Policy Analysis and Economics

American Chemistry Council

martha_moore@americanchemistry.com

(202) 249-6182