Peter Huntsman - Huntsman Knows How Podcast

It sure does.

Yeah, I'd rather be named after the company, not me.

Well, 2024 was indeed a very hard year. And as we look into '25, you know, we'll probably have time to talk about some of the more fundamentals as to what do we need to do to really see a turnaround. '23 was not a great year. In '22 we saw kind of, we started to see the fall off. So the end of '3, if you're looking at macroeconomic trends with a company, with the industry, you started to see a fall off in '22 going into '23. And some of the divisions and applications, '23 is a tough year, '24 is a tough year. And so it's been almost three years now of just really tough news. And I don't think that it was our numbers per se of today as much as where we think we might be getting a little bit of momentum going forward in certain parts of the markets.

Yeah, you get used to it because it's just the nature of our industry. And it may well probably get worse. The reason I say that is what are the things that most affect cyclicality in our industry? It's overcapacity and it's economic slowdown. Let's take the economic slowdown off the table for a second because there's so many variables that go into that. But when we talk about capacity, it used to be that you'd go out and build an MDI plant and an MDI line would be 40, 50,000 metric tons. Today there's six 100,000 ton facilities being built. Our largest Chinese competitor, Wanhua, has a single site location that has more capacity than all of the plants in North America, all the MDI facilities in North America combined. Think about that. One site in Asia has more than all of the facilities in North America combined. And so as you think about that, if they were to build another plant that size, it would probably take two or three years for the industry to absorb that much capacity. So with technology comes greater capacity, with greater capacity comes more volatility.

One of the things that I'm always amazed of is how little people really study those external factors and what are the variables behind them. Think how often we spend in the day reading news. Most of the news we read is gossip, right? We get on websites, we get on YouTube, we watch videos and we see this endless stream. Do we really understand? And if you understand what moves, you know, you're right, nobody can control them. But if you understand kind of where they're going or at least can make an assumption as to where they're going, the trend lines, you can start making assumptions into your business. Do we need to calibrate costs? This is something we just need to wait for a year or so.

So a rising tide will lift the cost of living, and that's a very insidious way of causing people to become poorer. And so we see interest rates rise largely through monetary policy. If we have too much money into a system, the value of that money will drop. If I come into this company and I've got 10 people on a floor and I'm trying to sell candy bars and I've got a thousand candy bars, I've got to sell all 10 of them, want it, I have to lower that price really, really low to move. Basic supply and demand, basic law. Monetary, we put too much money into a system, we can go back all the way to pre-COVID, and COVID had a lot to do with it and so forth. So we get interest rates start to go up. Interest rates used to be around 3%, they're now, well, close to about 7, 7.2%. That means that the cost of owning a home has doubled in the last couple of years. Now, is that going to change in the next couple of months? No, it's not. Is it going to go back to 3% within the next year or two? I really struggle to see any scenario, short of, one of the best things that could probably happen is a massive economic recession. I hope this doesn't happen, but a recession would cause interest rates to come down very quickly. So there are some mechanisms, but we typically don't want those to happen. Interest rates have to move very slowly.

I remember a lot of my friends were saying that's a great interest rate, because a lot of people two or three years before that were paying 18, 19%.

That's still low. So as we think about that, 7%, that's about where it's been over the course of the last 50, 55 years. So what does that mean for us? In that if we're building homes, that means that the cost of your home is now going to be almost doubling. Society has to get used to, I'm going to be paying the same amount for my home, but I'm going to be getting half the home. So we're kind of going back to the old normal. Going back to the old normal. When I was driving a truck and I had my first mortgage, it was just a rule of thumb, you bought a home for three times your salary. I don't think anybody's heard that phraseology probably 30 years. I remember my dad, I remember the bankers, I remember my boss telling me, you never pay more than three times your salary for a home, because interest rates were such that you just, and that was taking up a big chunk of your income. So as you look at some of these things, so in the United States, for Huntsman to kind of be running on all cylinders in the United States, we need to return to housing. That doesn't necessarily mean we need to have houses or mortgage rates go back down to 3%. That may be 50 years of history. I don't think that's a normal. I think that's actually too cheap, won't get into why. But as you, you're probably going to have to see a housing market that recalibrates itself. And that'll return, I think that'll return over the course of the next, probably over the course of the next year or two.

Think of how long it takes to build a chemical plant even in China. You're looking at probably six or seven years. You want to build an automobile plant, you're probably looking at five years. You want to build a steel mill, you're probably looking at 10 years. So look at those plants that are coming on in the last year or so, and go back six or seven years. You're in a time before COVID, you're in a time when the Chinese economy is growing at probably somewhere between 5% and 7, 8%. Monetary policy was different, interest rates were lower. US was buying huge amounts of raw materials coming in from China. And Chinese start to build out this massive wave of capacity to meet what's expected to be this continuation of what for them has been 30 years of continuous year-on-year growth. COVID comes along, lack of confidence in the Chinese market, the export markets start to close because Europe slows down economically, the United States slows down economically. China can't export as readily as it has in the past. And so the Chinese are now stuck with all this new capacity that's being built around this assumption that the economy is going to continue to grow. This new capacity comes onto the market, their economy starts to slow as well. I think the Chinese economy today, if you're seeing more than 1% growth in China today, I'd be surprised.

I think it's very, very low single digits. In housing, I don't think there's been growth since COVID. I don't think there's been growth for four years in housing. Remember, late 1970s China starts its economic boom. 1970s, 1980s, 1990s, 2000, 2010 up to 2020. That's 50 years. This is the longest, largest, hundreds of millions of people go from rural living in China into owning a home, in many cases owning more than one home. Hundreds of millions of people over a 50-year period, it was phenomenally successful. You tap the brakes on that, yes, you're going to see what you see now. Is it a disaster? Is it a depression? No, it's not. But until we see some sort of growth return in China, particularly in their housing markets and so forth, I think China's going to continue to do well for this company, but to take off, kind of be where it was pre-COVID, you need to have a little bit more economic activity.

Yes, absolutely. Low interest rates, lot of debt. This is a transition. Our, ours, I think it's worse than in North America's, but both places are higher rates, lot of debt. Theirs might be worse in North America, but they have different levers that they can be pulling. That is probably easier to do in China where you have more of a controlled economy. The states, those of us, but the United States is certainly going through an era where we've got too much debt. I mean, just think of this one statistic: today we spend more money on paying the interest for the debt of our federal government than we do for the United States Department of Defense.

Look, Kevin, I truly consider myself an optimistic person, and Europe has given us innovation galore. I mean, you go back over the last 100, 150 years. Europe gave us nitrogenous fertilizer that feeds half the world today. A lot of the nuclear ideas and physicists came out of Europe. The chemical industry came out of Europe. The pharmaceutical industry came out, most of them along the Rhine River Valley, starting in Basel going up into the Netherlands. This is where the Bessemer steel, this is where, I mean, industry was born in this stuff, went all around the world, not only exported technologies and know-how and education and culture and music, they exported wealth, they exported opportunity, they exported, in many cases, democracy. United States of America is given birth by European ideas around a republican form of government. And so I'm very optimistic when I think about Europe. We've invested as a family and as a company going all the way back, starting 1977, long before Huntsman Corporation was ever formed, my father had joint ventures, and the very first one we had was in Germany. My brother John went and worked there when he was 16, 17 years old. That would have been almost 50 years ago. So this idea, this anti or down on Europe, now I am down on their policies around energy and around regulation. And those two things I believe are ripping the European fabric apart. And the lack of ability to compete from a hydrocarbon, from a raw material point of view. I had an opportunity to meet with a large gathering of some 30 CEOs with Ursula von der Leyen a year ago in Antwerp. I will be meeting with her exactly one, well, this Wednesday in the Netherlands once again, I'll have the opportunity to express my views. A year ago I told her that we needed action and we needed to move and we needed to move very quickly. Whatever it is you're going to do, whatever your plan, she had not told us what her plan was, her plan was coming out that very next day. I'm going to go back and I'm going to tell her that nothing's happened. I said you need to move, she said she was going to move, nothing's happened.

Kevin, we, just over a decade ago, we produced 10 times the tonnage in Europe than we do today. Now think about that. We have seen a 90% decline in Huntsman's production rates in Europe. Now some of that is by design, asset sales, we've sold off assets, TiO2 and so forth. But a lot of those assets, the vast majority of those assets, we sold them off because we did not see a support of government, a support of energy policy, and we could see the writing on the wall. And had we not done that, had we still had today TiO2 operations, aromatics plant, and some of these heavy chemicals, we sold them off to companies that have since closed or gone through bankruptcy. And that's a terrible indictment on the economic policy, not of Huntsman, but the broader economic policy of Europe. And yes, so yes, I am very vested with Europe. It is one of our three engines that we have in this company of growth, of opportunity, of peace, people. And yes, I'll get very passionate when it comes to, we want to see a turnaround, we want to see an improvement. They're capable of doing better and they have to do better. They're on a road to destruction.

You can't get rid of hydrocarbons. Number one, you can't get rid of hydrocarbons as soon as you find an alternative. And I'm not just talking about hydrocarbons that go into energy, I'm talking about hydrocarbons as a raw material. Everything around this room, from this microphone, the clothing I'm wearing, the feedstocks, it's a feedstock for material. So if you can find a way to get this mug right here, this microphone, technology, wiring, if you can find a way to get that from wind, it's impossible. Physics just don't work. Okay, so as soon as, I'm ready to move from hydrocarbons, so you've got to give me an alternative. Problem with Europe right now is they want to ban hydrocarbons, all hydrocarbons, with no alternative. Intermittent wind and intermittent solar doesn't cut it. We're seeing that in the UK, we're seeing that in Germany where they have the highest energy prices today in the world. And even if you could power an energy-intensive industry on electricity from wind and solar or nuclear, you still need cheap feedstocks to make things. You've still got, so you can get hydrocarbons from North America, but if it's not cost-effective you can't make a profit and ultimately you're going to go out of business. Number one thing, an energy policy that makes sense. Number two, Europe has got to free up their entrepreneurial class. They've got to look at a tax system and incentive system. Europe is losing too many of its brilliant computer scientists, its engineers. Where are they going? They're coming here, they're coming to the United States. We sit in the United States and we complain about a high tax structure, we complain about too much bureaucracy. They come here and they think that they're being liberated. Number three, you need to get this idea that you're going to have regulation at the EU level, you have regulation at the state level, the federal, the country level, you're then going to have it at the state level, individual, then you're going to have it at the community level, have it at the city level. Layers and layers and just to get anything approved just takes years and years and that's just all added cost. It costs money to make a decision, it costs money to move forward, it costs money to buy your energy. And all of this just makes it an uncompetitive environment. It can all be fixed, it really can.

Well, one of our biggest challenges that we have today, and I hate to emphasize a negative within the company, but let's be honest. One of the issues we have today is our earnings capability. We've got a very strong balance sheet and the less money you earn, do you have enough money where you can pay your dividend? People say, well, cut the dividend. Well, the dividend is the money you're giving back to shareholders for having faith in your company. It's an incentive to invest, it's an incentive to invest, it's an incentive to invest behind the jobs of every single person that works in this company, to grow, to prosper, to invest in our future. That's what our shareholder base gives us. Okay, so if we've got to be able to generate positive cash flow to be able to keep the machine, to keep the engine going, and over the last three years largely, we've got a multi-billion dollar business in Europe, and aside from Advanced Materials, in almost three years we haven't made any money in Europe. We haven't made any money. The other regions are putting money into Europe to keep it going. And a strategy of, well, let's just sit back and do nothing and wait for the times to get better is not, that's a strategy for destruction in my opinion. We've got to be out there making decisions, we've got to control our costs, we've got to be looking at market innovations. Look, there are opportunities in Europe. I look at Advanced Materials, we're investing in aerospace, we're investing in lightweighting, we're investing in composite materials, we're investing in the electrical infrastructure and so forth. There are areas in polyurethanes, things around TPU and so forth, there's elastomers and some of the automotive applications. I look at the amines expansion we have going in, pet, fertilizer. You know, there's real opportunities that are out there. But from a macro, the bulk materials, these products that we make that go into housing, that go into construction, that go into large-scale automotive applications and so forth, we're not making enough on those because the demand is not there and the pricing power isn't there. We're not making enough there to cover our costs. So we need to do that to have the opportunity, we have to earn the right to grow.

A lot of that's going to depend where you are. Right, in the United States, where you have very competitive natural gas, you want energy-intensive businesses here because you're going to have an advantage. China, energy intensity comes from their large consumption of coal. China's building more coal-burning power plants right now than they've ever built. They consume more coal than the rest of the world combined. Think about that. And so you look at the low cost of energy in China, that's due in very large part because of their competitiveness in coal. We look at our raw materials and energy competitiveness in North America. The third area is going to see that is the Middle East, and those are going to be your three regions of basic building blocks. Europe is frankly missing out on it. It doesn't have to. They've got plenty of hydrocarbons, you've got plenty of coal, you've got plenty of technologists, fracking. You could frack, you can frack in Germany. Just two weeks ago the UK found a gas field that will supply, with present technology, that can be exploited and can supply the natural gas needs of the entirety of the UK for the next decade plus. Think of the wealth that that would create. You're not shipping your money, you're not shipping your power bills off to Norway, United States, Qatar, Russia, or someplace else. You've got these great opportunities, but you've got a policy that is too fearful to exploit them.

I have to kind of drive this point home. Because here you have an Energy Minister who presumably their job is to make their country an attractive place for manufacturers, and the UK's history in manufacturing is 150 years, Industrial Revolution, nobody comes close to UK. You find natural gas reserves that could power energy-intensive manufacturing very cheaply, low population areas, this is, it's like the Permian Basin in Texas. And the Energy Minister says we're going to keep that in the ground. And so when I read that, I always like to think that if you're the CEO of a company that needs molecules and cheap energy and cheap electricity and you hear a government minister saying, no, no, we're going to keep those resources in the ground and we're not going to convert them into wealth, prosperity, products, jobs, that's what I think people often fail to understand in this conversation. Is that those are the feedstocks, those are the baseline that you need to have energy-intensive manufacturing. And governments are saying no, we'd rather import those from North America or Norway. And that, I think it gets lost in the conversation that you need these things to function as a society, but for us or other chemical companies, you're never going to make money without them.

Well, Kevin, again, I don't want to be pessimistic here, but this is where I see the rank hypocrisy of all of this and the whole climate argument, is what's happening in Europe. It's not that people are shifting from coal or natural gas to wind and solar. That's actually the opposite. It's the opposite is happening. They're exporting these very industries to India, to China, to far dirtier, CO2-emitting places, and then reimporting the finished goods. They're losing, they're depriving themselves of the opportunity to tax, the opportunity to employ their people, the opportunity to take their own technologies and make these cleaner advancements and so forth. And basically they're taking their goods and services, their CO2s if you will, and they're just exporting it. Now, if you're a real environmentalist, what you'd be saying is we're going to do away with coal and we're going to replace it 100% with natural gas, and we're going to start, overnight, to try to get rid of natural gas and try to go to nuclear, try to go to something cleaner. You're going to transition, you're going to move this. But the transition right now is we want to stop doing this, we don't know where we're going to go, we don't know how to. And that's the frustrating part of somebody like me. You invest in a chemical plant, I look, give me free power every Wednesday. Terrific. But what I'm seeing is I'm seeing free power on Wednesday, Monday, Tuesday, Friday, Saturday, and part of day Sunday, I'm paying the highest prices in the world. And you can't compete in that sort of an environment. You have to have some reliability and continuity.

Well, I'm not going to get into the politics behind tariffs. If you're looking at this from a Trumpian point of view, the United States is the world's largest importer from virtually every region of the world. We consume, meaning we consume from virtually every region of the world, far more than we export to any of those regions. So Trump can sit back and say, you owe me, because I'm employing your people, I'm giving you revenue, it's all flowing to me, I'm buying all of your stuff and you're not buying any of my stuff. When you look at that, that's a trade deficit. That's what he's talking about. It's very balanced in Europe, stuff going in, stuff coming out. And when you look at China, China exports an enormous amount and they import very little, and the US does just the opposite. So it's interesting to note that when Trump was first in power in 2016 to 2020, he put a number of tariffs into place. People went crazy. Biden, right? People go crazy. Biden comes in office, the polar opposite from virtually every single belief that Trump had, except for tariffs. There was not a single tariff I'm aware of that Biden took away. So all these tariffs stayed for Trump, particularly on China. So you want to talk about, you know, the only thing that both sides of the aisle agree on in the United States, it's around tariffs.

Yeah, those are big questions, nobody has the answers. And it's very broad because I just got through saying that the US, Europe, and China for the most part were self-sufficient and reliant in all three of those areas. Great, so Huntsman's in good shape. Well, okay, but what are some of our largest customer segments? Automotive. Now, Automotive, look what's happening in the automotive industry. So we may be safe but our customers may be all over the place. They're fragmented. And you've got manufacturers, you've got automobile producers in Europe for example and in the US, they're calling for tariffs right now today, and you've got other automobile producers in Europe and in the US that are threatening to sue the government for imposing tariffs because they want to be able to take their products overseas and sell them in foreign markets. And so this is now, wow, it doesn't affect Huntsman, but you know what, it affects our customers. So we've got to understand what tariffs are, what the tariff loads are. But by and large, Kevin, you're going to want to be in an area of the world, you ask where do you invest and what do you invest in, you want to be in an area of the world where your raw materials, that supply chain, your manufacturing, and your consumers are all going to be in a common market.

Well, I think it's going to be, you ask me, I've been in this industry for a long time and I hate to admit it, 40 years. But there's kind of one axiom that I really try to live by, and that is you never invest in a product that is mandated or subsidized by the government, because as sure as the government is going to change, whether it's TBE, whether it's gasoline mandates, whether you've learned that the hard way, we've learned that the hard way, that comes with the wounds. We've invested hundreds of millions of dollars over the years and we've been tossed to and fro as government policies and dictates and subsidies and tax policies change. And so when I think of something like EVs, EVs exist in China and in the United States largely because of government mandate and because of government policy. Ultimately in a free market, all of the United States and Europe, probably to some degree even China, it's going to be dictated by the consumers. And where you've got an even playing field, I don't even think you have an even playing field in the United States. You certainly don't in Europe and you really don't in China. You mean on the manufacturing? On the manufacturing, the subsidies. I mean, nowhere in the world can you go buy an ICE vehicle and get a $7,000 subsidy, 7,000 EUR subsidy or whatever the subsidy is in Europe given the country and so forth, where the government is literally paying you money to go buy this car. The government is picking winners and losers. Now there are all sorts of policy reasons as to why they may or may not do that, but you look at the largest fall-off from one month to the next in EVs that happened in any country is when the subsidies stopped at the end of November this past year in Germany, and sales collapsed. Now what happened to those companies that invested all the billions of dollars? And that's the danger of all of these sort of things.

We can do a whole podcast just on transportation, aerospace, transportation, road transportation, autonomous driving vehicles. Huntsman's going to play a role in all those things, whether it's the

Well, one is the here and the now, and the other one is really somewhat of a gamble on the future. Miralon is very exciting. In very short, you take natural gas or methane, you put it into a reactor that's not much bigger than this room — quite a bit longer but not much wider — and at the end of it you get hydrogen, pure hydrogen, and you get almost something that looks like cotton candy but much, much finer. And what it is, it's just pure carbon fiber, and you've got to have that weigh less than a pound for an entire sheet of this stuff. That's our material. Our material right now is orbiting planets other than planet Earth. It's being used right now. Now we need to lower the price of it so that we can sell it on a wider basis. So we're — when I said talk about Miralon — we're in the process right now of designing a five-kiloton, 5,000-ton reactor. We have a 30-ton reactor that's operating in San Antonio, and this is a scale-up from a reactor that isn't much larger than this table. So making great progress. But where do we see this going? It's going to be going to everything from strengthening concrete to replacing carbon fiber to the aerospace industry to EV battery extending. It's exciting. The possibilities are exciting, but it probably won't be hitting the market in scale for probably another year or two in scale. We're gradually going to be building up the markets and profitability.

When I look at something like EG grade — now we're talking about a grade of purity for an amine product that goes into the solvents, the applications and so forth of cleaning and processing and handling chips. Chips are getting smaller and smaller. You get a much bigger than an atomic-sized particle on a chip, it's going to slow it down, it's going to slow down your processing and so forth. And so the products that we use to clean, handle, process, manufacture those chips — the chemicals that are used for that — surprise, surprise, chips need chemicals, who knew? And so we have to get our parts per billion, and probably looking at a future of parts per trillion of cleanliness. This stuff that just a few years ago was completely unheard of, and we're now doing this in Conroe, Texas, and we're now being qualified with chip manufacturers. And this will be a very fast-growing end of our business.