Chemical & Engineering News
December 15, 1997
Copyright © 1997 by the American Chemical Society

NORTH AMERICA

Expanding Trade Continues To Drive Canadian Chemicals

George Peaff
C&EN Northeast News Bureau

I n mid-November, the Bank of Canada gave notice that it was contemplating a rise in short-term interest rates in Canada to slow down that country's overheating economy. It sees Canada's gross domestic product growing greater than the 4% the bank had originally forecast for both 1997 and 1998.

If the rate increase is implemented, it probably will slow what has been strong economic growth in Canada-growth that the chemical industry has benefited from.

Based on the growth trends in the first eight months of 1997, Canada's chemical exports could near $10 billion (in current U.S. dollars) for the year, compared with $8.9 billion in 1996 and $8.7 billion in 1995. But Canada's chemical imports, based on C&EN estimates, have grown a bit faster than exports. For 1997, Canada's chemical imports could reach $14.7 billion, compared with $13 billion in 1996 and $12.1 billion in 1995.

Invariably, Canada's chemical industry remains linked to the well-being of the industry in the U.S. and the relative strength of the U.S. economy in general.

In 1996, 80% of Canada's chemical exports went to the U.S., and 75% of Canada's chemical imports came from the U.S. Those percentages are not likely to change very much for 1997 or 1998, based on the continuing relative strength of both the U.S. and Canadian economies. The last round of chemical tariff reductions as part of the North American Free Trade Agreement (NAFTA) will become operative on Jan. 1, 1998. The last round of overall tariff reductions between the two countries under NAFTA will take effect on Jan. 1, 2003.

Although the Canadian chemical sector fared well overall in 1997, several trends and developments during the year may not bode well for some of the Canadian industry.

Calgary's Nova Corp. is a case in point. In November, Nova outlined a plan to divide itself into two companies in response to pressures by its shareholders over the company's low stock price. Nova has proposed to split the natural gas services businesses from its petrochemical operations, which include ethylene and coproducts, propylene, styrene, polyethylene, and polystyrene.

For the first nine months of 1997, Nova's petrochemical sales were $1.84 billion, up nearly 15% from the same period in 1996. But operating earnings were nearly flat at $211 million, compared with $210 million in the first nine months of 1996. The company says the weakness in the styrene and polystyrene markets "is persisting," and that planned capacity expansion in the U.S. and Asia will make significant pricing improvements difficult in the near term.

Chemical imports rise faster than exports

Chemical imports/exports
graph

Note: All data converted at recent exchange rate of $1.00 U.S. = $1.408 Canadian. a C&EN estimates. Source: Statistics Canada

As for ethylene and polyethylene, Nova says the unplanned operating outages of several producers and shipping problems in the U.S. have stabilized pricing at higher levels in 1997. But "over the medium term, several planned ethylene capacity expansions are expected to result in market supply exceeding demand," Nova says. "Consequently, ethylene prices may weaken, leading to further polyethylene price erosion."

DuPont Canada, DuPont's Canadian subsidiary, also reported higher sales for the first nine months of 1997 compared with the same period in 1996, but flat net earnings. Sales were $1.09 billion for the 1997 period, a 9% gain from the 1996 period. Sales for agricultural products were up 29%, automotive finishes were up 23%, engineering and specialty polymers were up 13%, and fibers and intermediates were up 7%.

Although the volume of shipments was higher, lower prices tempered DuPont Canada's earnings. For the first nine months of 1997, earnings were $112 million, compared with $111 million in the same period in 1996.

In response to the weakness in the pulp and paper industry, in July, DuPont Canada's parent announced the sale of its worldwide hydrogen peroxide business to Germany's Degussa. DuPont Canada's Maitland, Ontario, and Gibbons, Alberta, hydrogen peroxide plants will be included in the sale.

Total chemical shipments and price results for the first three quarters of 1997 bear DuPont Canada's experience. Canadian chemical shipments likely will reach $22 billion in 1997, a 7.4% increase from 1996. Organic chemical shipments could reach $4.7 billion, a nearly 12% increase, and inorganic chemical shipments could reach $2.2 billion, a nearly 5% rise. Shipments in the remaining chemical categories-including synthetic rubber and plastics, fertilizers, and pharmaceuticals-could reach $15 billion, a nearly 8% increase.

But overall 1997 prices for chemicals and chemical products likely will average about the same as compared with 1996. Prices for organic and inorganic chemicals will likely fall 0.5% and 3.5%, respectively, but will be offset by price climbs in other chemical categories.

In contrast to companies that are selling off businesses, Potash Corp. of Saskatchewan completed the purchase of Memphis-based Arcadian Corp.- renamed PCS Nitrogen-in March. The Arcadian acquisition added nitrogen fertilizers and chemicals to Potash Corp.'s potash operations. Some 40% of PCS Nitrogen's sales are to industrial customers, which helps to balance out the seasonal cycles of agricultural buyers.

Canadian chemical shipments rise...

Canadian chemical shipment
graph

...and chemical prices are mixed

Chemical prices graph

Note: All data converted at recent exchange rate of $1.00 U.S. = $1.408 Canadian. a C&EN estimates. Source: Statistics Canada

For the first nine months of 1997, Potash Corp. had sales of $1.72 billion, compared with $1.06 billion in the 1996 period, which did not include sales from PCS Nitrogen. Potash Corp.'s net income for the first nine months was $225 million, compared with $163 million in the same 1996 period.

Based on reports of Canada's largest chemical segments-petrochemicals and fertilizers-by Industry Canada, the counterpart to the U.S. Department of Commerce, "the outlook for the year 2000 is for continued growth." For petrochemicals, that growth is based on Canada's strong supply base for natural gas and oil, and is based on the internationally competitive petrochemical manufacturing facilities in Canada. For fertilizers, growth is based on the increasing demand for fertilizers in developing countries and is helped by the mergers occurring among Canadian fertilizer producers and the expansion of those firms outside Canada.



VARIED RESULTS FOR CANADIAN CHEMICAL OUTPUT IN 1997




A wild card as to where the fortunes of the Canadian chemical industry are heading may be found not in Canada but in the Asia-Pacific region, where currency and government turmoil have thrown economies into decline. In South America, too, government initiatives and stock market declines probably will have a negative effect on the economy.

A growing portion of Canadian chemical exports-those not going to the U.S.-in the past have gone to those regions. In June, Canada's and Chile's free trade agreement became effective. And Canada is negotiating with Brazil, Argentina, Paraguay, and Uruguay to participate in the Mercosur regional market agreement.

But will Canadian chemical exports to Asia and South America-mostly fertilizers and plastic precursors-decline because Asian and South American production capacity will replace them? Or will Asian and South American projects be halted as financing dries up, thus making it necessary for those nations to continue to import Canadian fertilizers and plastic precursors? It is too early to tell where the industry will go.

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