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December 16, 2002
Volume 80, Number 50
CENEAR 80 50 pp. 17-26
ISSN 0009-2347


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2002 INDUSTRY REVIEW

While hoping for better prospects, chemical companies struggled through an uncertain 2002 by restructuring their businesses and shifting operations

ANN M. THAYER,C&EN HOUSTON

8050-8025 coverWhile it's easy to say the chemical industry has seen it all before--cyclical markets, lagging demand, overcapacity, high costs, and poor economic conditions--2002 was, in fact, entirely different. For in this year, the business climate was in the shadow of the terrorist attacks of Sept. 11, 2001. Thus, every action taken by industry and its executives, employees, and companies at their facilities resonated with implications for physical and economic security, safety, and stability.

Whether prospects for the chemical, pharmaceutical, and biotechnology industries have turned a corner still is uncertain. A few positive indicators that the situation is improving--such as a slight upturn in earnings and a better performing stock market--have emerged at the end of this year. Nevertheless, the economy remains volatile, easily unhinged by threats of war, unresolved issues of corporate credibility, and erratic consumer confidence. So it may not be until 2004 or later that recovery takes hold.

Besides these added challenges, traditional business dynamics still were at play in 2002. Competition forced companies to make the usual changes in strategy, asset mix, production capability, technology, and products.

Late in the year, the American Chemistry Council (ACC) released a generally upbeat annual performance and outlook report. It expects indicators--including overall profits and shipments in consumer products, basic chemicals, and life sciences--to be up for 2002 and suggests that growth will continue and perhaps accelerate in 2003.

"Since chemical industry performance is often an engine of growth and an indicator of economic health," says Gregori Lebedev, ACC's new president and chief executive officer, "it is good news, indeed, that we are seeing evidence that the chemical sector is beginning to rebound."

CHEMICAL ECONOMY. Chemical producers were optimistic at the start of the year that 2002 would turn out better than 2001. But that said, in January, ACC's projections were still placing sales and earnings growth below where they were in 2000. These projections were based on a survey of 95 ACC members representing $187 billion in annual sales.

Overall chemical sales were predicted to grow about 2.1%, with life sciences growing more than 7%, specialties nearly 4%, and basic chemicals less than 2%. However, the sectors' contributions to an overall 42.5% growth in net operating income were reversed: Basic chemicals were seen enjoying a 56% rise in income, while specialty chemicals were to be up about 11%, and life sciences were expected to fall about 0.5%.

Cost cutting eventually helped improve earnings for many companies. For the first nine months of 2002, sales for a group of 25 leading U.S. firms fell 3.4%, but earnings rose 9.3%. There had been no gains until the third quarter, when sales rose 2.2% and earnings jumped 43.2%. Chemical earnings at the five major U.S. oil companies soared 159% over nine months.

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"It is good news, indeed, that we are seeing evidence that the chemical sector is beginning to rebound."

Major European producers BASF, Bayer, and Degussa showed assorted earnings results, often because of special charges from divestitures and restructuring, whereas some specialty chemicals firms in the region reported higher operating income despite declining sales. Leading Japanese companies also offered up a mixed picture for nine-month results.

A positive outlook for the full year is still in question. Many European specialty producers anticipate that results will be better than in 2001. In the U.S., Dow Chemical and DuPont temper their optimism because of geopolitical uncertainties, volatility in feedstock and energy costs, and a slower pace of economic growth.

A survey conducted a few months into 2002 found that nearly two-thirds of the chemical industry CEOs and analysts responding did not expect the business environment to improve significantly until 2003 or beyond. The state of the economy, they said, is a more important issue than energy prices, the environment, and public perception. Nearly half the executives were still looking to fix things through cost cutting, rather than growing through innovation.

Future-oriented business spending, often considered necessary to fuel an upturn, has been depressed. Industry R&D spending is expected to be down by a few percent for the year, while capital expenditures might show only a "bare bones" rise of just over 2%. However, ACC predicts that a recovery in profits will set the stage for increased expenditures in 2003.

The chemical industry has been working against high feedstock and energy costs and a lackluster economy all year. U.S. chemical production had been trending upward for most of the year, but began to slide downward in August. However, it generally remained above 2001 levels. Demand began to fall off slightly late in the year, and the inventories-to-shipments ratio began to rise in the second half. Nearer to the year's end, ACC reported that U.S. industry shipments were up 2%.

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BICENTENNIAL DuPont CEO Holliday (left) and Chief Scientific Officer Thomas M. Connelly Jr. celebrate the company's anniversary in 2002.
PHOTO BY PETER CUTTS
Trade also has been problematic from the start; the industry began the year with a deficit. For most months, the deficit persisted, although expanding and contracting in size. A brief surplus appeared in March, and chemical trade was nearly breakeven in May and June. Through the first nine months of 2002, exports were flat at $60.3 billion, while imports grew 6% to $63.1 billion, resulting in a $2.78 billion deficit for the period.

On a positive note, chemical prices have been climbing steadily all year, coming out of a trough hit in December 2001 and January 2002. In the start of the fourth quarter, prices were up 4.1% from the same period last year, according to Commerce Department data. Prices for industrial chemicals, the largest single segment of the industry, have risen 7.4%.

Chemical company stock performance during the year reflected the dismal situation in the chemical economy. In the first quarter, when there still was optimism that the economy would rebound, a group of 25 leading chemical stocks tracked by C&EN gained more than 9% and outpaced the broader stock market.

However, in the second quarter, corporate scandals, global unrest, and a lack of confidence took their toll. By the end of September, C&EN's chemical stock index had turned down 14%, although it was still doing better than the Dow Jones industrial average, which was off 24%.

A brief uptick in the stock market that brought the Dow Jones index up about 12% between Sept. 30 and early December helped boost chemical stocks by about 5% as well. Although Cambrex, Crompton, and Solutia continued to lose ground, several companies had double-digit increases in their share prices, including DuPont, which jumped nearly 20%.

EMPLOYMENT CUTS. Many chemical and pharmaceutical companies attempted to improve their financial performance through cost cutting, and that included shrinking employee rolls. However, the number of announced cuts lessened some in 2002 compared with 2001. ACC predicts that better company performance will lead to a slight rise in employment in 2003.

Labor Department data show U.S. chemical employment for October 2002 at 1,006,000 workers. Employment actually was fairly stable, staying close to an average of 1,008,200 over the first 10 months of the year. In contrast, Labor reports employment fell by 16,000 in 2001, with most of the decline in the past six months.

Globally, redundancies, arising largely from mergers, led to companies announcing nearly 50,000 job cuts in 2001, not including 27,000 at Sinopec (China Petroleum & Chemical Corp.) alone. In 2002, planned job eliminations at major chemical and drug firms totaled about 23,000, with more than 60% of the total at European and Asian firms.

8050covbus2.ceBayer accounted for many of the planned cuts--300 at operations in Canada and 1,300 in its troubled pharmaceuticals business (on top of 1,300 announced last year). Later in the year, following the acquisition of Aventis' agribusiness unit, Bayer announced another 4,700 layoffs, again in pharmaceuticals and in its crop science business. By 2005, the company intends to cut 15,000 jobs, or 12% of its workforce--5,300 in polymers, 4,000 in crop protection, 3,000 in health care, 1,300 in chemicals, and 1,000 in service operations.

Targeting ailing business units, DuPont decided to shed 2,000 jobs in textiles and 650 in coatings. Rohm and Haas increased its planned cutbacks to 1,860, up from about 1,300 it had indicated in 2001. Similarly, Akzo Nobel said it would trim another 1,500 on top of 2,000 scheduled in 2001.

Linde will cut 1,550 jobs, while Dainippon Ink & Chemicals projects slashing 3,500 over three years. And Eastman Kodak intends to shave 1,500 R&D jobs. Likewise, BASF is revamping crop research and will reduce R&D staff by 1,130 employees in the next three years.

Besides Bayer, other pharmaceutical firms will pare operations. Late in the year, Abbott said it would eliminate 2,000 positions, while Akzo Nobel will drop 300 at its Organon unit. Bristol-Myers Squibb decided to shutter its Wilmington, Del., R&D site, acquired with its late 2001 purchase of DuPont Pharmaceuticals. It will offer jobs to about 100 of the 655 employees affected and has invited the rest to apply for 200 R&D openings at other locations.

Meanwhile, at the annual Society of Chemical Industry meeting in October, European executives worried about how to attract and retain the young scientists needed by their companies. In its competition with other business sectors for employees, the industry is encountering an apparent lack of enthusiasm from prospective employees about working for chemical companies.

Dow employees may have to be satisfied with just having jobs in the current environment, since the company has decided to freeze salaries next year, including that of CEO Michael D. Parker, as part of a cost-cutting program. This year, Dow and DuPont disclosed that Parker and DuPont CEO Charles O. Holliday Jr. did not receive bonuses for 2001--about half of their annual compensation--but did receive salaries of nearly $1 million each and stock options.

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Copyright © 2002 American Chemical Society



 
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