The economic sky turns cloudy

Experts forecast modest economic growth at best. The global economy is slowing, led by a pronounced weakness in the United States resulting from the housing downturn and the credit crunch. And this, of course, will significantly impact the chemical industry.

By Seán Ottewell, editor at large

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The global economy is slowing, led by a pronounced weakness in the United States resulting from the housing downturn and the credit crunch. And this, of course, will significantly impact the chemical industry.

Worldwide demand for chemicals will continue to grow but at a lower rate, forecasts the American Chemistry Council (ACC), Arlington, Va., a trade group whose membership includes major American chemical companies. Its “Year-End 2007 Situation and Outlook” report issued in December predicts modest production rises in 2008 and 2009 of 2.1% and 2.3%, respectively, capital growth of 6.3% and 6.0%, respectively, and moderate increases in both profit margins and R&D spending.

This comes against the backdrop of strong performance by the U.S. chemical industry in 2007, notes ACC. Driven by the low value of the dollar and robust economic growth overseas, exports reached a record of $154 billon last year and are expected to continue to rise, to $169 billion this year and $180 billion in 2009. Last year saw the first trade surplus in chemicals for six years, with exports outpacing imports by $500 million. The surplus should grow to $2.1 billion in 2008 but flip back to a $1.8 billion deficit in 2009, predicts ACC.

The industry faces some high risks, cautions ACC. These include the ongoing financial problems and an oil price shock, according to its chief economist Kevin Swift. “These are the things that could rain on the parade,” he explains.

That the parade was likely to see some of the wet stuff was becoming apparent by the time the International Monetary Fund (IMF), Washington, D.C., published its “World Economic Outlook” (WEO) in October. Up to then, the global economy had been expanding vigorously, driven by 11.5% annual growth in China, 9% in India and almost 8% in Russia.

The WEO predicts healthy growth to continue into 2008, with emerging market economies continuing to serve as the main growth engine of the world economy (Figure 1). However, it warns: “The IMF’s projections are based on the assumption that market liquidity is gradually restored in coming months. But there is still a distinct possibility that recent turbulent conditions could have a deeper effect on credit availability than envisaged by the IMF in its baseline scenario, with considerably greater macroeconomic impact.”

Figure 1

Chemical reaction


Such macroeconomic issues clearly affect chemical companies, but few are revealing too much about the impact.

DuPont, Wilmington, Del., for example, told securities analysts in November that it expects lower demand from the U.S. housing and auto markets in the fourth quarter but that strong sales growth outside the U.S. would more than make up for it.

At the end of September, Dow, Midland, Mich., announced a 10% increase in sales.

This prompted Andrew N. Liveris, chairman and CEO, to say, “We posted record quarterly sales with substantial [double-digit] growth in Europe, Asia Pacific and Latin America… all this underscores that our strategy to grow internationally…is working.”

However, that upbeat news was tempered in December when Dow announced that it planned to trim 1,000 jobs or about 2.3% of its total workforce, in an effort to shed underperforming businesses and boost global efficiency. The cuts are expected to save the company up to $180 million/year, “freeing up capital and resources that will be directed toward value-creating growth opportunities,” according to Liveris.

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