Production in the U.S. of the 50 largest volume chemicals reached yet another high in 1995, coming on the heels of the banner growth recorded in 1994. Chemical industry economists and observers, who had anticipated the softer growth rate for 1995, expect 1996 to see similar gains in production.
According to C&EN's annual ranking of the Top 50 chemical products, based on preliminary data, total production of the group rose to 750 billion lb last year, up 5.0% from 1994. That increase maintains some of the momentum of the 7.6% gain in production of the Top 50 chemicals in 1994. Forty of the Top 50 registered production gains from 1994. But much of the 1995 production story was dictated by inventory levels.
"The first half of 1995 was great," says Hugh Pylant, senior consultant at Houston-based Pace Consultants, but in the second half consumption started dropping, and users were working off inventories. The strong growth in 1994 for the U.S. economy pushed growth for the Top 50 chemicals into early 1995. Housing starts slid in 1995, and motor vehicle production, robust in the first half of the year, leveled off.
Exports saw significant gains in 1995, says Allen J. Lenz, director of economics at the Chemical Manufacturers Association. Industrial chemical exports rose to $31.0 billion from $25.5 billion in 1994. Although the U.S. gross domestic product rate of growth fell in 1995, overseas sales of U.S. production helped maintain the momentum. For 1996, exports are not likely to have as dramatic an impact on sales growth. "I don't think we can match what we did last year," says Lenz. "We can't do 20% gains every year."
"I haven't seen anything as confusing [to predict] as 1996," says Pylant. "Basic chemicals look pretty strong, but the economic indicators are looking weak. Inventories are at rock bottom. Maybe some demand will come from rebuilding inventories, some from exports. China, which has recently come back into the market, could boost export demand."
With plastics making less notable gains in 1995 than 1994, chemicals destined for use in plastics had mixed results. "The polyester market weakened in the Far East," curtailing upstream production, says Bruce H. Pickover, vice president of industry consulting firm Chem Systems, Tarrytown, N.Y. But, he says, improvements were noted in January and February.
Petrochemical demand went on a roller-coaster ride in 1995. Overall, ethylene production grew 5.3% from 1994 to almost 47 billion lb and that of propylene grew 7.3% to 25.7 billion lb. Following the 1994 boom and unplanned plant outages that tightened supply, producers ran plants at full throttle to meet demand. Demand peaked at midyear, says Pylant. "But producers didn't throttle back production. Overcapacity trashed the market." Although the market has since begun to rebalance, maintenance shutdowns postponed to 1996 are expected to limit production this year.
For petrochemicals, "basic demand will continue to grow," says Pickover. But worldwide, he anticipates little capacity growth in 1996. The one ethylene plant scheduled on come on-line in 1996, in India, is expected to be delayed to 1997, he explains.
For chemical producers, "1995 was the most profitable year we've had," says Lenz, "but that was mostly a function of price." The Federal Reserve Board's production index for industrial chemicals grew 2% in 1995 over 1994, following an 8% gain in 1994. CMA members, says Lenz, reported a 5.6% growth in sales volume for 1995 and predict 5.3% growth in 1996. "It's pretty much more of the same," says Lenz. "I don't see any reason to expect greater increases than in 1995."
The production calculations are "very much driven by the Top 10 items," warns Lenz, and the Top 10 had a rather good year. Sulfuric acid output grew 6.4% in 1995 - a full 5.73 billion lb more than in 1994 - bringing production to 95.4 billion lb. Nitrogen output grew 6.5% to 68.0 billion lb, and oxygen production grew 6.8% to reach 53.5 billion lb.
Agricultural chemicals, which account for much of the Top 50 production, had a mixed year in 1995. Production of lime rose 7.5% to 41.2 billion lb, and that of phosphoric acid grew 2.4% to 26.2 billion lb. Nitric acid's output rose 0.1% to 17.2 billion lb, ammonia's rose 3.2% to 35.6 billion lb, urea's slid 2% to 15.6 billion lb, and ammonium nitrate's fell 6.2% to 16.0 billion lb. Potash production rebounded 4.4% to 3.22 billion lb after 1994's 7.1% decline.
Fertilizers are expected to have significant production gains in 1996. With grain inventories at 20-year lows, government corn acreage set-asides (land the government pays farmers not to plant) that were 7.5% in 1995 have been eliminated for this season. Analyst Donald D. Carson, vice president of New York City-based J. P. Morgan Securities, predicts a 7 to 9% rise in U.S. fertilizer consumption this year. And the freedom to farm bill, approved last month by Congress, is expected to maintain demand for agricultural chemicals at higher, market-driven rates.
U.S. government-produced data, which has been the main source for C&EN's Top 50 chemical ranking, is expected to be severely limited next year. Synthetic organic chemicals data will cease to be collected after October as part of the government's cost-cutting measures, so that estimates will not be available for full-year 1996, and final annual numbers will not be available for 1995. "It's going to make it impossible to do analyses that we've done before," says Lenz.
The loss of the data stream is expected to confound future predictions, says Pace's Pylant. "You need to have access to historical patterns for forecasting."
The House Committee on Ways & Means deemed the synthetic organic chemicals reports "neither cost-effective nor essential to ensuring the competitiveness of U.S. industry." The U.S. International Trade Commission has collected and reported data since 1917.
Mirroring the Top 50 chemicals production, synthetic polymer production followed the 1994 rebound with a slower growth year in 1995. Output of these polymers - plastics, synthetic fibers, and synthetic rubber - grew by 1.3% last year, compared with 8.2% in 1994. For these polymers, preliminary data show that production rose to a record high of about 75 billion lb.
Plastics, which now account for nearly 80% of total polymer production, grew only 1.2% from 1994, with production reaching about 59 billion lb. "Last year, I talked about 10% growth in sales and captive use of all plastics," says Kevin L. Boyle, manager of marketing research for Occidental Chemical and chairman of the Society of the Plastics Industry's Committee on Resin Statistics. "It seems that [1995 was] quite different from [1994] for the industry as a whole." Sales and captive use held steady, with an increase of 0.3% over 1994 totals.
Inventory rebuilding helped keep production growing faster than sales through 1995. "The sales pace set [in 1994] was generally beyond the ability of production capacity to meet," says Boyle. "Inventories were drawn down to critically low levels, particularly in the commodity thermoplastics. Some think that inventory shifted from converters to producers in 1995." Exports of resins rose 11.8% in 1995, also helping maintain growth.
Thermoplastic resins saw an overall 1.1% production increase to about 52 billion lb, with a 1.5% decline in sales and use from 1994. Thermoset resins had a better year than thermoplastics, Boyle says. He estimates production at 7.64 billion lb, up 1.7% from 1994, and sales and captive use at 7.60 billion lb, up 1.3%.
Because of the changes in the North American market - wrought in part by the North American Free Trade Agreement - SPI has begun to change its statistical compilations to include Canadian production. Polypropylene and polyvinyl chloride (PVC) figures now include Canadian production. Although C&EN's production totals include the combined U.S.-Canadian polypropylene and PVC production, growth rates have been calculated ignoring polypropylene. PVC statistics were compiled on both a U.S.-only and a combined basis in 1994 to permit a smoother transition.
Construction accounts for nearly two-thirds of the market for thermoset resins. Sales were reined in by the decline in housing starts, which were estimated at 1.33 million units in 1995, compared with 1.46 million in 1994. But unsaturated polyesters had another good year in 1995, adding a 10.1% production gain to 1994's 16.1% gain.
Boyle says 1996 sales of plastics are expected to improve."Housing starts will be up over 1995, durable goods and disposable income and all of the key indictors promise good signs for plastics in 1996."
U.S. synthetic rubber production grew 4.3% in 1995 to reach 5.57 billion lb. That reflects 1995 growth for synthetic rubber output in all of North America, which has remained on an upward path for four years. The constant growth is "unprecedented in modern times," says Britt D. Theismann, information and systems director of the Houston-based International Institute of Synthetic Rubber Producers. "Synthetic rubber consumption in North America experienced a fourth year of expansion and is forecast to moderately increase in 1996."
Tires were the end use of 84% of solid styrene-butadiene and 75% of polybutadiene in North America. In 1995, tire production increased to rebuild inventory, raising styrene-butadiene production 2.2% to 2.08 billion lb and that of polybutadiene 11.2% to 1.21 billion lb.
Auto production was robust at the beginning of 1995, Theismann says, "but slowed in June and leveled off for the rest of the year." As a result, he says, growth rates in automotive-related, nontire elastomers were running "close to 10% for the first five months, but leveled off."
Theismann predicts that synthetic rubber consumption will grow moderately in 1996. "A fifth year of growth, moderate as it may be, is reflective of the economy as a whole. Economic expansion is forecast to continue through 1996, but at a slow rate," he explains. Citing a forecast of economic slowdown between 1997 and 1999 with recovery by 2000, he predicts a five-year North American rubber consumption annual growth rate of 0.7%.
Synthetic fiber production, which grew 7.1% to 9.96 billion lb in 1994, slipped 0.1% in 1995 to 9.95 billion lb. U.S. cellulosic fibers output remained stable at 500 million lb. Noncellulosic fibers production slipped 0.1% in 1995 to 9.45 billion lb.
Ferro Corp. has undergone a transformation in the past year. In January, Chief Executive Officer Albert C. Bersticker relinquished the title of president and became chairman, and Chief Financial Officer Hector R. Ortino moved up to the office of president. The company brought in a new executive to head the ailing powder coating business just last month and hired a vice president of marketing, a new position in the company in April 1995.
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| Bersticker: acquisition targets selected | Ortino:
shareholders will see benefits |
Stock analyst Saul H. Ludwig, managing director of the investment firm of McDonald & Co., Cleveland, says the changes presage "a new spark of excitement and sense of urgency at Ferro." He thinks the changes will "accelerate earnings" over the next few years.
But the sense of urgency seems to have come about because Ferro - the Cleveland-based producer of ceramics, colors, coatings, plastics, and chemicals - stumbled when it purchased the powder coating business of London-based ICI in 1993. Profit margins in the powder business had tumbled. Although talk of Ferro as an acquisition target died down after Bersticker took over from former CEO Adolph Posnick in 1991, new rumors surfaced that Morton International was interested in buying Ferro. However, the personnel changes at the company over the past year, along with a new marketing strategy, seem to have quelled the rumor, and Ferro has revitalized its acquisition strategy. Bersticker hopes the company will reach $2 billion in sales by 1999 when he retires, up from $1.3 billion in 1995.
The company issue and credit line "give us all the borrowing capacity we need to make acquisitions," says Ortino, 53, a native of Argentina who has been with Ferro 25 years. Ortino is now in line to succeed Chairman and CEO Bersticker when Bersticker reaches the mandatory retirement age of 65. "We have some acquisition targets in our sights now," says Bersticker, a 38-year veteran of Ferro who began his career with the company as a research engineer with a master's degree in mineralogy.
Bersticker does not say what those acquisition targets are just yet. But he has been shopping around since he succeeded Posnick as CEO (C&EN, Feb. 22, 1993, page 9).
Late last year, Ferro paid U.K.-based Cookson $92 million for the Synthetic Products Co. (Synpro), a polymer additive firm it has wanted to buy for the past decade, says Bersticker. That acquisition will add about $110 million in annual sales to the company's chemical operations that not only include polymer additives, but also fuel additives, solvents, and catalysts. If the Synpro purchase had taken place at the beginning of 1995 instead of at the end of the year, it could have boosted the chemical segment of Ferro's total sales from 20% to more than 26%.
Synpro met Ferro's criteria for acquisitions. "It is more than $50 million in size," says Bersticker. "It had, in our opinion, very strong management in place. It was certainly in our core technology of mixed metal-oxide [plastic] stabilizers ... and it brought us to a preferred market position."
The Synpro acquisition was only the latest and largest acquisition for Ferro over the past few years. In 1993, Ferro purchased ICI's North American and European powder coating business for $51 million. Powder coatings are heat-fusible resin coatings that give off no pollutants as they cure. The ICI powder coating acquisition added $75 million to Ferro's powder coating business and put it in the "leading" position worldwide, says Bersticker. Major domestic competitors include Morton International; St. Paul, Minn.-based H. B. Fuller; and U.K.-based Courtaulds. Major international competitors include not only Courtaulds, but also Netherlands-based Akzo-Nobel and the Herberts paint manufacturing arm of Germany's Hoechst.
Since the ICI powder coating acquisition, Ferro has made a few smaller purchases. It bought Germany-based Bayer's ceramic and color business in Italy in 1993, and the Diamonite ceramic products business from W.R. Grace in 1994.
Even as Ferro purchased new businesses, it jettisoned some older units, including a foundry products business and some commodity-oriented plastics businesses including Eurostar, a Europe-based operation that sold filled and reinforced thermoplastics. The strategy behind both the acquisitions and divestitures is to try to "avoid expansion in product lines that exacerbate" the cyclical nature of the company's earnings by serving appliance and automotive markets, says Bersticker.
Whereas 1995 sales rose 11% from 1994 to $1.3 billion, earnings rose only 4% to $47.4 million. Income as a percent of sales fell from a recent high of 5.4% in 1992 to 3.7% in 1995. By comparison, 1995 average earnings as a percentage of sales for 11 diversified manufacturers, including Ferro, that C&EN tracks were 8% (C&EN, Feb. 19, page 17), up from 7% in 1994.
Ortino explains that earnings were hurt in 1995 by a $7 million drop in profits in Latin America, compared with 1994, when Ferro got caught in the devaluation of Latin American currencies following the Mexican peso crisis. About 7% of Ferro's sales are in Latin America. "One-time tax breaks in 1994 were not repeated in 1995," he says, and a one-time $5.6 million charge in severance costs for 70 European employees further reduced profits.
"If you take out the charges, our earnings as a percentage of sales would probably have been closer to 5%," says Bersticker. His personal goal is to see Ferro achieve 7 to 8%. "It is not a formal corporate objective," he says. But "we really feel we can get close to that."
McDonald & Co.'s Ludwig thinks Ferro can achieve a 6% return on sales, and he thinks the company has a bright future. Despite a slow first quarter in 1996 because of continuing weakness in Ferro's Latin America operations, Ludwig predicts business will pick up again during the rest of the year.
Nevertheless, Ferro's overall operations could not expect to achieve profit margins of 6 or 8% until it reworked its powder coating unit.
The ICI powder coating acquisition got in the way of Ferro's profit goal. In his letter to shareholders in the 1994 annual report, Bersticker wrote: "We misjudged our ability to assimilate the domestic powder coating business into our Nashville facility. ... We were successful in retaining all the business, but the margins suffered."
But now, says Ortino, "The problems we encountered with the absorption of the ICI business are behind us. Our facility in the U.S. is ... becoming very efficient." However, Bersticker and Ortino both admit the appliance and automotive markets have slowed recently. They intend to boost their powder coating business and other businesses with more attention to "the marketplace needs of our customers" and an emphasis on technology that will allow Ferro to develop "new products, new [product] applications, and new [manufacturing] processes."
Their strategy is to direct R&D spending, now at about $24 million (2% of sales), to market areas with the most promising growth. "We might spend 7 or 8% of our research dollars in some of our chemical and plastics operations. We might spend more on some electronic materials," says Bersticker. Ortino promises shareholders will see the benefits soon. The company has come up with a new powder coating manufacturing process that will lower cure temperature and raise quality, he says. In addition, Ferro is working with DuPont to develop clear powder top coats for the demanding automotive market. Automakers General Motors, Chrysler, and Ford have shown interest in the DuPont-Ferro effort, says Ortino.
With new management, renewed profit targets, and updated strategies in place, Ferro is not often mentioned nowadays as a takeover target. Says Bersticker: "There is a price for everybody. But we would not be a cheap company to take over, nor would we be an easy company to take over. We are rather complicated. Having said all that, it doesn't mean somebody wouldn't do it. But our main objective is to keep our earnings high. We feel we can do well as an independent company. We see no need for being with anybody else."
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