William Storck
C&EN Northeast News Bureau

As the U.S. chemical industry enters  2001, the chemical economy must  be a disappointment. Less than six months ago, it looked like 2000 would be a fairly good year--probably the best year for the industry since 1995.

The economy was showing steady growth; the stock market, if not chemical stocks, had set records in the spring. And inflation was in check largely because of increased productivity. These factors would all feed into the chemical industry.

The chemical industry itself had started the year on an up note. During the fourth quarter of 1999, earnings were good. The 25 chemical companies regularly surveyed by C&EN had modest 4% earnings growth in the final three months of the year--the only quarter to be up from the comparable year-earlier period since early 1998.

And this continued into 2000 with even better aggregate earnings growth for the C&EN sample in the first and second quarters. This uptick ended with the third quarter, however, when the rising price of oil increased feedstock and energy costs faster than chemical producers could raise selling prices. Coupled with an apparent slowing economy, this situation produced the first earnings contraction in a year. Nevertheless, the strength of the first two quarters likely will carry the industry through to full-year earnings growth, unless fourth-quarter earnings fall by more than about 15 to 20%.

But in most respects, except perhaps for the important earnings figures, 2000 was a good year for the chemical industry. Industry fundamentals performed well. According to the latest available government data and C&EN estimates, production of chemicals and allied products will increase some 4.9% in 2000, compared with a rise in output for that broad category of 2.1% in 1999. However, annual growth in output of industrial chemicals and synthetics will ease back to a still good 4.3% this year from 5.0% in 1999.

Chemical pricing finally showed good improvement after languishing since about 1995. The producer price index for chemicals and allied products, when the final numbers are in, should be up almost 5% over last year, following only a 0.1% increase in 1999. And prices for industrial chemicals will grow a huge 8.7% this year after a 2.0% contraction last year.

Besides costs, the blot on the chemical landscape--if there is one--will be foreign trade of U.S. chemicals. The value of exports of all chemicals will set a record this year, growing 15% to about $83 billion. Imports, however, will set a record of even faster growth. They will increase 22% to almost $75 billion as imports from Europe continue to grow largely because of the relative weakness of the euro against the dollar. This will cause the third straight year of decline for the chemical trade surplus. In 2000, it will fall some 11% to about $8.7 billion.

But the decline of the trade surplus in 2000 is just one-third that of 1999, when the chemical trade surplus fell 33% to $9.8 billion. Exports of all chemicals that year rose only 3.9% to $72.0 billion as imports jumped 13.9% to $62.2 billion.

Although the government does not break out industrial chemical foreign trade, the American Chemistry Council (ACC, formerly the Chemical Manufacturers Association) forecasts industrial chemicals performing better in trade this year than the broad chemical category. ACC estimates that exports of industrial chemicals will increase 20% this year to about $45.4 billion while imports will rise 17% to $33.5 billion. Thus, industrial chemicals recorded a larger surplus this year than it did in 1999--increasing 19% to $11.9 billion.

Both specialty chemicals and life sciences will show trade deficits, according to ACC--a deficit of $5.8 billion for specialties and a deficit of $800 million for life sciences, which includes pharmaceuticals and agrochemicals.

Demand for U.S. chemicals has been strong this year. Using Commerce Department figures, shipments of chemicals and allied products will increase about 6% to $438 billion. This follows a 5.5% increase in 1999. And demand for industrial chemicals will rise about 3.5% to $190.0 billion after an increase of just 2.0% in 1999.

The relatively slow growth in the value of industrial chemical shipments has meant a waning influence for this important chemical segment in total shipments. At one time, this segment made up more than 50% of the value of chemicals and allied products. This year, it will be about 44%, down from 46% just two years ago.

Imports of chemicals cut into domestic demand, which is calculated as shipments minus exports plus imports for chemicals and allied products. Domestic demand for the broad chemical category will rise 6.3% this year after an increase of 7.1% in 1999.

But all of the good performance for exports, demand, production, and pricing was not enough to overcome the huge increase in oil prices--and thus feedstock costs--in the middle of the year. This and a number of other trends that began before and during 2000 will continue into 2001, filling next year with a great deal of uncertainty--much of which has to do with the overall U.S. economy and its effects on the cyclical chemical industry.

The economy has been in an expansion mode for some nine years now, with the last two years showing extremely robust growth. And, in the past year, the chemical industry finally began to participate in that expansion. Now, however, there are questions.

Just about a month ago, the standard line coming from economists and security analysts was that there would be a slowdown in the economy in 2001. This was based largely on the interest rate increases that the Federal Reserve Board put in place over the past year. However, recent economic developments have called into question whether it will be a slowdown or an outright recession.

For instance, in November, the Commerce Department revised third-quarter growth of gross domestic product downward to 2.4% from its preliminary estimate of 2.7%, the slowest growth in four years. The latest figure puts GDP growth at less than half the 5.6% growth seen in the second quarter. Jerry Jasinowski, president of the National Association of Manufacturers , says, "The revised data confirm that the slowdown has arrived, and the remaining question is how hard the landing will be, with the prospect that growth may slow even more in the manufacturing sector than in the economy as a whole."

Also, the Conference Board, a New York City-based business research organization, said that, although still high, consumer confidence hit its lowest level in a year in November. How much of this is because of high oil prices and other economic worries and how much is due to the deadlock over the presidential election, however, is anyone's guess.

And in the first 10 months of this year (the latest data available), the Index of Leading Economic Indicators--which is compiled by the Conference Board for the government--fell from the previous month five times, was unchanged another three times, and rose only twice.

Jump to

Introduction United States Canada Latin America Europe Asia

Little of this has affected forecasts for 2001 economic growth, however. The Federal Reserve Bank of Philadelphia, in its latest survey of 34 economic forecasters, published on Nov. 20, says, "The outlook for the U.S. economy is little changed from that of three months ago." According to the report, predictions are for growth of 5.2% in 2000. For 2001, the bank sees a significant slowdown from 2000, but its forecast increased slightly from three months earlier to 3.3% from 3.2%.

Two important and related questions remain: How much of the step-by-step interest rate increases designed to slow the economy have yet to work their way through the system? And how fast can the Federal Reserve Board, if the need arises, act to lower interest rates to counter a possible recession? Answers to these two questions will have a significant impact on economic growth next year.

But assuming no recession, the chemical industry will see a slowdown based on the trends that have come into place this year. Putting it succinctly--trends will continue, at least for a while.

However, assuming moderate economic growth next year, the chemical industry is still going to see a slowdown. Already the Federal Reserve Bank of Dallas is reporting a slowdown in petrochemicals, and this will almost undoubtedly spread. With that in mind, demand for chemicals and allied products next year will probably grow no faster than about 5.5%. Industrial chemical demand will likely be 3.7% above the 2000 level.

Accommodating this growth in demand, ACC, in its annual publication, "Performance and Outlook for the Business of Chemistry in the U.S.," predicts that production of chemicals and allied products will increase just 2.5% in 2001.

Growth in the value of shipments will be fueled by prices. With industry capacity utililization rates above 80%, producers should be able to get through reasonable price increases next year. Thus, prices for industrial chemicals, while not surging, should increase, on the high end, perhaps 4% for chemicals and allied products, and a slower 3.5% for industrial chemicals.

But on the flip side, energy prices will continue to increase. ACC predicts that feedstock costs will rise a seemingly modest 3.8% next year. But added to the 60.7% increase in feedstock costs in 2000, this is not an insignificant rise. Likewise with other energy costs, which ACC forecasts will grow by 13.0% next year. In 2000, ACC says other energy costs rose 54.5%.

Several other chemical industry trends will continue next year but are difficult, if not impossible, to quantify. In foreign trade, as long as the dollar-euro situation persists, there will be a continuation of growth in imports of European chemicals into the U.S. as the euro countries produce in cheaper euros and sell in stronger dollars, which are then converted back to cheaper euros.

Consolidation and restructuring of the industry will continue. Already, Hercules is essentially up for sale, the divestiture of BFGoodrich's chemical business will take place, and there will be more. Industry observers say that there might be as many as five new, large consolidations next year. Additionally, the Dow-Union Carbide merger, languishing since August 1999, may finally be resolved.

Top

a C&EN estimates. Source: Bureau of the Census

Top

a C&EN estimates. Source: Bureau of the Census

[Previous Story] [Next Story]

Top

Top

Chemical & Engineering News
Copyright © 2000 American Chemical Society