Chemical market endures the seesaw effect

Oct. 7, 2004
U.S. producers see economic growth coming from stronger exports and imports. However, some forecasters say that the long-term trends are less upbeat.

If you blinked at some point this summer, you may have missed the peak of the current business turnaround in the U.S. chemical industry. In its “Mid-Year Business of Chemistry Situation and Outlook,” the American Chemistry Council (ACC), Alexandria, Va., forecast that growth had accelerated during the first half of this year and that the industry would post a 4.5% growth rate in value of shipments for the year. However, there are signs that growth is already slowing down; ACC predicts a drop in rate to 3.8% in 2005. If the industry’;s traditional cyclical pattern holds, growth will continue to decelerate after that. However, slower growth certainly is better than no growth. It marks something of an accomplishment, given the frustrating cycle faced by the industry during the past three years when repeated forecasts of a turnaround never panned out.

Part of this growth is coming from stronger exports. While the U.S. chemical industry has been running a trade deficit since 2002 and will again this year — the deficit is expected to shrink somewhat by the end of 2004 (Table 1; view it by clicking on the Download File button at end of the article). Based on U.S. Department of Commerce data through the middle of this year, ACC finds that chemical exports are up 17.4% overall, to nearly $53 billion. Imports are up, too, but only by 12.6%, to $56.3 billion.

Because these figures are in dollars, they reflect changes in pricing and exchange rates, as well as in production or trade volumes. “According to Federal Reserve production data, overall production of chemicals is up by nearly 6% on a year-over-year basis,” says Kevin Swift, senior economist for ACC. “For basic chemicals, production was also up nearly 6%, while specialties were up by 9%.” Rising petroleum and natural-gas prices have not, as many feared, put a lid on U.S. exports of commodity petrochemicals. These show double-digit increases so far this year. “The U.S. plants are efficient producers,” he says, and the improving global economy is creating a need for these products.Looking at the world chemical situation, Swift says, “At this point, it is perhaps better to refer to the global expansion rather than recovery. Looking to the long-term, global economic growth is expected to average 4% per year during the period between 2004 and 2014.”  This means U.S. producers can benefit from strong growth occurring in the world even if domestic demand doesn’;t keep pace, he explains. The worldwide chemical industry will expand to meet the demands of this economic growth, and American plants can play a role.

Domestic trouble on the horizon
American plants now are benefiting from this worldwide expansion, but the long-term trends for U.S. producers are less upbeat, say a number of market forecasters. They worry about the disappearance of low domestic natural-gas prices, which for decades have fueled U.S. petrochemical production; higher petroleum prices worldwide, which will affect the economics of the chemical industry and favor countries with abundant petroleum supplies; and the continuing impact of China as a global manufacturing force.

Instead of its historic advantage in natural gas cost, the United States currently has the highest price in the world. Citing a variety of industry sources in its mid-year report, ACC says natural gas averaged $6.30 per million Btu in the United States, compared to $4.80 in Germany, $4.55 in China, and $1 or less in South America, Russia and the Middle East. Most industry sources view the current situation as a localized capacity crunch brought on by increased demand for natural gas for electricity production. But they also warn that natural gas prices are unlikely to return to their historic average of $2 to $4 per million Btu.

Manufacturers of automobiles, household appliances and the like have talked much in the past year about the “China price” for a component or subassembly. This is a shortcut way of saying, “I can source this product in China at a lower price. Can you match it?” Industry experts say the China price is starting to have an impact on chemical production as well. “Aspartame, the artificial sweetener, is a good example,” says Dilip Chandwani, a vice president at the market-research firm Kline & Co., Little Ferry, N.J. “It started as a single-source product from G.D. Searle [now part of Monsanto], then saw competition from a few other Western producers. Now there are a dozen places you can go to in China where it is available at a low price. The quality might not be there yet, but it is coming up rapidly,” he says.

Not so special anymoreThe aspartame example illustrates another troubling trend. Specialty or fine chemicals have been viewed in past years as safe havens for domestic producers. These materials generally command a premium price because of their performance. They often involve complex chemistry or proprietary technology and substantial technical support, which can create a barrier to others entering the market.Specialties have been hit by many of the same pressures as commodities in recent years, and this has taken a toll on the financial performance of some of the small- to medium-size specialty manufacturers. Moreover, imports of specialties are growing as rapidly, if not more so, than those of many commodities. ACC’;s mid-year report shows growth rates of 11% to 34% in the value of imports of such high-tech specialties as electronic chemicals, active pharmaceutical ingredients and plastics additives, versus the same period in 2003. The overall mid-year average, 19.4%, exceeds both the average of all imported chemicals and of the growth of specialty-chemical exports from the United States.Producers have two main options, says Elie Saad, president of the functional chemicals group within Lanxess (a newly spun-out subsidiary of Bayer Corp., whose U.S. headquarters is in Pittsburgh): backward-integrating to control the supply and thus the cost of intermediates, or limit fixed costs, such as capacity, and produce more only when market demand and prices are strong.In the former case, Saad cites Bayer’;s (now Lanxess’;) phosphorus-derivative business. “Bayer doesn’;t mine phosphate but we do produce intermediates such as PCl3 or POCl3. These are raw materials for our specialty products, such as alkyl or aryl phosphates. Our customers are willing to pay us a premium for those based on the technical service that we provide.”Albany Molecular Research Inc. (AMRI), Albany, N.Y., typifies the other approach. The company, since its founding in 1991, has grown both organically and through acquisition, to a $196-million (in 2003) producer of pharmaceuticals and specialty chemicals. The company contracts R&D — employing several hundred chemists and researchers — and has acquired a contract manufacturing facility. Its contract research allows AMRI to be reimbursed while doing the R&D, and it then turns the results over to the client for commercialization. Conversely, its contract manufacturing capabilities allow it to perform limited production runs for a variety of clients rather than tying a lot of capacity and financial resources to one product.The formula has its ups and downs. Although still on a growth track, the company has seen a downturn during the first half of this year and has reduced staffing and expenses. Contract manufacturing revenue fell because of reduced client demand. The company also decided to close an Illinois research center and consolidate the activities there into headquarters operations. “The amount of foreign competition and their substantially reduced business costs means that AMRI finds itself in an increasingly competitive environment for many of our services,” says Thomas D’;Ambra, chairman, in announcing the 2003 results. Among its initiatives for going forward, he notes, are ongoing efforts to develop both process technology and production capacity in fermentation. The company also is looking at the possibilities for joint ventures abroad.Companies without a good R&D pipeline and substantial resources face particular problems. “Consider the case of a producer of plastics additives that has been supplying a company that makes molded parts — hair dryers, for example,” says Fred Peterson, head of Probe Economics, Millwood, N.Y. “When the molded-part production goes to China, what are its options? It might not be big enough to support customer service in China, or it might consider following its customer to China and developing production and service facilities there. In either case, the smaller company is facing a tough situation.”Impact of Contained Trade
Figure 1. Exports of value-added resins have risenfrom 1997 to 2003, but the growth of imported goods containing these resins has significantly cut into the trade surplus.  Source: Probe Economics

Peterson’;s example also highlights a hidden part of the global chemical business — the “contained trade” of chemicals that are part of products imported into the United States. In government statistics about imports, these don’;t show up as imported chemicals; however, to the domestic producer whose customer base has moved abroad, they are the equivalent of imported competition.

Peterson’;s firm is one of several that are now looking more closely at the distinctions between direct, or “per se,” trade in chemicals and “contained” trade. As Figure 1 indicates, the trends are not promising. “Our expectation that engineering resins would be less affected by contained trade was based partially on our belief that the U.S. trade balance in nondurable goods, which use commodity resins like polyethylene, has been hurt more than the balance in durable goods — things that last longer than a year,” he says. Comparing 1997 to 2003 shows that even in these premium materials, the U.S. trade situation is deteriorating. In commodity resins, it is already negative, with a total deficit (considering direct and contained trade) of -$1.9 billion in 2003. Petrochemicals, synthetic rubber and adhesives, which all run a direct deficit, look a lot worse when contained trade is included.

Regardless of whether U.S. chemical companies go abroad or not, they should be thinking about a global strategy,” he concludes. “The pace of innovation might have to speed up, or the company might simply decide to return more money to its shareholders.”
Nick Basta is editor at large for Chemical Procesing magazine. E-mail him at

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