This year has been an extremely good one for the U.S. chemical industry. Sales have increased and earnings at chemical companies are up dramatically. Thus, profitability has improved substantially. Demand for chemical products is up, prices are up, and production has moved ahead, albeit slightly in many cases. The foreign trade situation is the best it has ever been.
As 1995 comes to a close, there is little that the average chemical company executive can wish for, except that 1996 will echo this year. However, almost by definition, even if the chemical industry does improve in 1996, its growth will be slower as it bumps up against its strong performance in 1995 and a slowing U.S. economy in 1996.
This year has been so good that industry observers are using superlatives to describe it. For instance, Allen J. Lenz, director of trade and economics for the Chemical Manufacturers Association (CMA), says, "It's been a blockbuster year for chemicals, and based on our sneak previews, the industry can expect another strong showing next year."
By the end of this year, prices received for chemicals and allied products probably will finish up about 9% from 1994, and prices for industrial chemicals - generally the most important building blocks of the industry - will increase almost 14% over last year. This easily keeps chemical prices growing faster than raw material costs, helping to build the bottom line once more.
Chemical output will continue to rise... and chemical prices will rise even faster... driving chemical shipments to new recordsProduction improvement, however, has not been as strong as that for prices this year, rising less than 4% over last year for the broad chemicals and allied products category and increasing less than 1% for industrial chemicals. This is a turnaround from 1994, when production growth handily outstripped price increases in both chemicals and allied products and industrial chemicals.
However, there is a mixed picture in the production data. Output of basic inorganic chemicals has been declining since midyear, as has production of synthetic materials, which include plastics and fibers. And production of industrial organic chemicals has been relatively flat throughout the year. Nevertheless, output of higher value added categories such as pharmaceuticals, soaps and toiletries, paints, and agricultural chemicals, has been growing.
Polymers, tied as they are to automobiles and construction, illustrate the problem of a slowing chemical economy throughout 1995. After beginning the year with fairly good increases, demand has slowed for plastics and for fibers as export demand slowed in major downstream markets such as construction and automobiles. According to the Society of the Plastics Industry's Committee on Resin Statistics, shipments of resins were essentially unchanged through September at 51.7 billion lb. Thermosetting resin shipments were up only 1.0% to about 5.66 billion lb and thermoplastics were down 0.2% to 46.1 billion lb.
The problem has been worse for synthetic fibers since this sector was already showing little growth during the early part of 1995 from early 1994, averaging just a 1.4% rise in fiber shipments through the first quarter. By the end of the third quarter, demand for synthetic fibers totaled 7.09 billion lb, off 0.2% from the same nine months in 1994. Nylon staple shipments have been particularly weak, dropping almost 10% in the first three quarters from the comparable period last year.
Chemical production employment plateaus .. while total employment continues downwardProduction and demand were both helped by exports in 1995. Exports of chemicals will grow between 18 and 20% from last year to top $60 billion, accounting for some 10% of all exports of U.S. goods in 1995. And the chemical trade balance will grow some 18% to almost $22 billion.
Helped by the weakened dollar and by improving foreign economies, exports of most chemical categories will show double-digit increases. For instance, exports of organic chemicals, the largest chemical trade sector, also has the biggest increase, rising about 30% from 1994 to some $16.5 billion. Plastics exports, too, have grown strongly, up some 24% to about $15.5 billion. Exports of fertilizers have grown by 27% this year to about $3.4 billion; dyeing, tanning, and coloring materials, 15% to almost $2.7 billion; inorganic chemicals, 13% to almost $4.6 billion; essential oils, perfumes, toilet, and cleansing preparations, 11% to $3.9 billion; and miscellaneous chemicals, 21% to more than $9 billion. Only exports of medicinals and pharmaceuticals have grown at a less than double-digit rate, rising about 7% to $6.5 billion.
One of the only negative aspects of 1995, as it has been in the past few years, is employment. This, of course, is good for chemical company earnings but bad for employees and perhaps, in the long term, bad for future chemical development. Total U.S. chemical employment continued its decline in 1995, and the increase in the number of production workers, like production itself, plateaued at midyear. This lagging indicator of the chemical economy may have begun to pick up in the past few months, however. The result of the basic economic fundamentals of the chemical industry is extremely good profit growth this year. Earnings for the industry should be up some 50% over last year on a sales gain of about 15%. Profitability also improved, with profit margins for the 30 major chemical companies regularly surveyed by C&EN approaching 10%.
Next year, however, may be another story. The first part of the year should be a continuation of the second half of 1995 - gradual slowdown, but still very good on a historical basis. This will reflect the general U.S. economy.
Economic predictions are that gross domestic product in the U.S. next year will grow much less than it did in 1995. Forecasters are putting GDP growth at less than 3% next year - usually in the 2.6 to 2.8% range. They are saying that 1995 will finish with a GDP increase of about 3.3%.
U.S. trade deficit is still getting larger...while trade surplus for chemicals stays strongThe slower growth in the general economy next year will undoubtedly be reflected in a highly cyclical industry such as chemicals. A survey of its members by CMA shows that they expect the dollar value of sales to continue to grow next year, although at a much smaller rate than in 1995. They project a weighted average of only about 2.5%, significantly lower than their estimate of 13.8% for 1995. However, 81% of the respondents expect sales gains next year, while an "overwhelming 93.8%" expect increased sales in 1995, according to the CMA survey.
However, the survey predicts a higher 4.3% increase in physical volume of sales in 1996. The difference between growth in poundage and growth in dollar sales indicates the respondents believe that chemical prices will fall slightly in 1996.
And they expect that net operating income will be essentially unchanged in 1996 from this year. This follows a 67% increase for CMA members in 1995 over last year. CMA says 90% of the respondents report an increase in net income this year, but 78.7% see profits from operations climbing next year.
And the respondents to the survey expect exports to continue their growth in 1996, although the 6.1% increase in dollar value that they expect is much less than the 21% growth that they have seen in 1995.
A survey of members of the Synthetic Organic Chemical Manufacturers Association (SOCMA), which is generally made up of smaller, more specialized chemical companies, often with higher value added products than the CMA members, shows them to be more bullish about next year. The SOCMA survey shows that a majority of the small firms (those with less than $10 million in annual sales) expects sales growth to top 10% next year. But most of the medium-sized and larger firm members believe that a sales increase will be in the 0 to 10% range.
In terms of profits, however, the largest percentage in each of the three size categories sees increases greater than 10% in 1996.
The survey of larger CMA companies also shows the following:
Thus, it looks as if 1996 will be better even than 1995 in many respects. The coming year may well continue to set records in exports, probably trade surplus, as well as earnings and profitability, even though growth will be slower than that seen this year. A cloud may be on the horizon for 1997, however, when many economic forecasters are predicting GDP growth of less than 2%.
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