For three years running, according to economists at the American Chemistry Council (ACC), Arlington, Va., the next year was projected to be the turnaround year for the overall chemical business. When growth sputtered in the first half of each of those years, forecasters predicted a stronger second half. And when the year as a whole came up short, the prognostication was for a recovery the following year. A "maana" recovery -- one that will happen tomorrow -- was the term coined by chagrined analysts to describe the frustrating trend.
This time around, though, tomorrow has arrived; some sunlight is peeking through the clouds. Perhaps the greatest reassurance comes simply from the dramatically cyclical performance that the worldwide chemical industry has demonstrated for about the past 10 years (Fig.1). If the bottom of the downturn was reached at some point between the latter half of 2002 and the first half of 2003, we're now in the up part of the cycle.
At the end of 2003, there was a greater sense of confidence that a buoyant business environment will exist. The recent record of quarterly growth in gross domestic product (GDP) -- the best in some 20 years -- is a strong indicator that the U.S. economy is heating up. In nearly all recent years, when the U.S. economy revived, so did the chemical industry, more or less in tandem.
ACC projects a 3.3% growth in U.S. production volumes for 2004, versus an estimate, in its annual year-end survey/forecast, that 2003 will show a 0.3% drop in production volume -- the third year running of decreased chemical production. Shipment values will rise by 4.5%, reaching a new record of $487.7 billion. The turnaround, if it holds up, will be a welcome change for chemical producers. "The past three years have been the worst downturn I've seen in my 35 years of following the chemical industry," says Fred Siemer, head of a same-named financial analysis firm in Highland, N.Y.
Chemical Industry Growth Pattern
Figure 1:The worldwide chemical industry has experienced a near-sine-wave pattern of cyclical performance since the early 1990s.
It would be premature, to say the least, to break out champagne and celebrate the return of good times in the North American chemical industry. Operating rates are still lukewarm -- in the 78% to 79% range -- making company managers cautious about expanding capacity. "Restructuring," the codeword for shutting plants, selling divisions or cutting employment levels, is still the dominant philosophy among major chemical companies. High, sustained natural gas prices make the raw materials for many petrochemicals expensive. Most significantly, there are signs that chemical industry is in the process of "decoupling" from the overall U.S. economy. Historically, the industry had grown at rates of roughly 1.2-1.5 times the U.S. economy as a whole; now, the ratio is dipping below 1.0, indicating that the chemical industry will not share fully in overall economic growth. These and other factors suggest "that unlike former recoveries, the bounce back won't be as steep and the run-up to the next peak may not be as long," says ACC. "In some cases, it may be years before past peaks in volumes and profits are reached."
Bright spotsHowever cloudy the long-term outlook might be, industry managers are welcoming the sunshine on the industry today, simply because the switch from negative to positive production trends represents a reversal of a long and painful downturn.
ACC's forecast within specific industry sectors shows that the upturn will take place at different rates (see Fig. 2). Over the 2004-2008 time frame, the highest growth rates will be in pharmaceutical compounds, "other" specialty chemicals, and adhesives and sealants. The lowest growth rates -- 1.0% or less -- will be in bulk petrochemicals and intermediates, and inorganic chemicals.
While commodity chemicals have borne the brunt of the overall economic downturn and feel the pressure from imports most directly, industry is dealing with a painful new reality: the end of a price advantage for natural gas liquids (NGLs) in the U.S., especially in the Gulf Coast. Industry analysts speak of a "secular market change," meaning nothing in the foreseeable future will alter this dynamic. Historically, natural gas was priced at around $2-3 per million BTUs, and gas and NGL derivatives were in comfortable supply. U.S. petrochemical producers based much of their production on cheap gas and were able to supply export markets from the Gulf Coast more competitively than, say, Western European suppliers, who have depended mostly upon naphtha derived from crude oil.
In recent years, gas production has not significantly increased, while demand has surged, mostly from a combined environmental and energy-efficiency policy of promoting the fuel for electric power plants. In the past two years, gas futures on spot markets leaped to $5-6 per million Btus, eliminating the domestic advantage. The result: reduced exports, and shuttered plants in the Gulf Coast. Chiding Washington, William Stavropoulos, chairman of Dow Chemical Co., Midland, Mich., told Wall Street analysts in December that "our national energy policy is simply to pray for cool summers and warm winters."
Dow, along with ACC, for most of the past year has been decrying a natural gas "crisis." Commenting on a report from the National Petroleum Council, Washington, D.C., on natural gas markets earlier this year, Geoff Hurwitz, director of government relations for Rohm and Haas Co., Philadelphia, noted that the NPC report projects a 25% decline in natural gas consumption by the chemical industry. "Most of that decline will come as a result of 'demand destruction,' natural-gas-consuming factories shutting their doors and moving away," he said.