Prices of most chemicals moved up in 2007 in response to the giant leap in oil prices and chemical buyers in 2008 can expect further, though modest, price increases, especially if the U.S. economy gets back on its feet and producers seek to boost their margins.

While the price increases of 2007 were difficult to swallow, according to some chemical industry economists, they were less extreme than they could have been, mostly due to depressed U.S. demand for chemicals and their downstream products. That slackening chemicals demand has been due mostly to the struggling housing market and the sub-prime mortgages market, as well as more expensive gasoline and home heating oil.

In the short-term, an economic recovery would push prices up further, but in the 2009–2011 timeframe, market experts say a flood of new petrochemical feedstocks and supply from the Middle East could send chemical prices on a downward trajectory. Looking at demand, the domestic chemical industry has certainly taken a hit recently. Right now "housing is in free fall, and I don't think we've seen the end of that yet," says Kevin Swift, the chief economist for the American Chemistry Council (ACC), an Arlington, Va.-based chemicals industry trade group. The automotive industry is also depressed, which reduces chemical demand, he notes, which combined put a major damper on demand last year. According to Swift's calculations, each housing start consumes nearly $17,000 worth of chemicals and plastics, while each new automobile absorbs more than $2,400 of chemical products. So the downturns in these sectors are making a big dent in chemical makers' profits, putting more pressure on them to increase prices for the chemicals they are selling to recoup their own escalating energy, fuel and feedstock costs.

What is keeping the U.S. chemical industry afloat and kept suppliers from disappearing from the U.S. market, says Swift, is robust exports of chemicals to overseas buyers. In fact, the U.S. chemical industry had a foreign trade surplus in 2007 for the first time since 2001. The weaker dollar against the Euro, Swift explains, has made chemical products made in the U.S. economically attractive to overseas buyers.

Benzene prices are predicted to climb for the first three quarters of 2008, until a fourth quarter turn.

Higher prices for ethylene and polypropylene  will yield in early 2009 with new capacity.

Despite healthy exports, the slump in the U.S. chemicals market has made it difficult for chemical manufacturers to pass along all of their increased energy and raw materials costs to chemical buyers in the U.S. Pass-alongs have been a problem for Rohm and Haas, for example. In a recent year-end review, the company says it incurred some $60 million more in raw materials costs in the fourth quarter of 2007 than in the same period a year earlier, but expects to recoup $10 million of this through price increases. During the first quarter of 2008, Philadelphia-based Rohm and Haas says it hopes to recover 80% of its raw materials cost escalation through higher prices.

While greater demand after a period of stagnation usually makes it easier for companies to play catch-up in their pricing, petroleum tags are still the most important factor in pricing decisions. And in 2008, oil will probably come down from its recent astronomical levels, says Price, "although it may bounce back up from time to time."

Purdue University agricultural economist Alan Miller predicts that chemical prices will advance by anywhere from 2–6% in 2008 because natural gas prices are likely to average 9% higher in 2008 than in 2007, which will "prop up" prices of ammonia and other nitrogen fertilizers.

The most important factor in the long-term chemical pricing situation is a host of giant petrochemical complexes that are now planned or under construction in the Middle East and the Far East. The Middle East plants, for example, will more than double that region's petrochemical capacity, according to a recent study by ChemSystems in White Plains, N.Y.

Price says the excess capacity, "will bring chemical prices down all over the world, including in the U.S."