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

NORTH AMERICA

U.S. Chemical Industry To See Modest Growth Next Year As Economy Cools

William J. Storck
C&EN Northeast News Bureau

T his past year has been a year of contradictions for the U.S. chemical industry. Chemical producers in the U.S. have seen demand grow, both domestically and in overseas trade. Output from chemical plants has increased, inventories have remained at relatively good levels, employment has remained trim, and productivity, when the final figures are in, probably will have risen again.

On the other hand, pricing has been offsetting many of the gains in the industry's economic fundamentals. As in the past few years, prices for chemicals-especially large-volume commodity products-have not increased very much. Also, producers, especially during the first half of 1997, complained of high raw material costs. And the strong dollar against foreign currencies has meant that imports of chemicals are attractive.

The result has been that earnings for the chemical industry have hardly moved, although sales are up slightly. Profitability for the industry has thus declined. For the 30 chemical companies regularly tracked by C&EN, sales for the first nine months increased 3%, whereas earnings were essentially unchanged from the same period in 1996. Profit margins dropped from 8.7% to 8.5%- still healthy, but the trend is going the wrong way.

However, anecdotal evidence suggests that the industry will end the year with a slight uptick in earnings since stronger growth that began in the latter part of the third quarter has continued into the final period of the year.

The outlook for next year is probably more of the same. Although most of the fundamentals look relatively stable, trade and the impact of weak currencies on country-to-country business-especially in the Asia-Pacific region-are less predictable.

Chemical output will increase next year...

Chemical output graph

a C&EN estimates. Source: Federal Reserve Board

...and prices will inch forward...

Pricing graph

a C&EN estimates. Source: Bureau of Labor Statistics

...raising the value of shipments

Shipment value graph

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

When the final data are in for this year, U.S. production of chemicals and allied products probably will have grown about 4.1% from 1996. This is much improved over the 2.2% growth in output last year. And the crucial industrial chemicals category, which includes basic chemicals and synthetic materials, will increase a likely 4.1%. This is a vast improvement over the negligible 0.2% increase for industrial chemicals in 1996.

Likewise, pricing is a little better than last year, when the government's producer price indexes for chemicals actually declined. The government data this year should show a 1.2% rise for chemicals and allied products, compared with a 0.4% decrease in 1996. And overall prices of industrial chemicals should inch up a slight 0.3%. Last year, producer prices for industrial chemicals fell 1.4%.

Thus, C&EN estimates for 1997 a healthy 5.8% increase from last year to $395 billion in the value of shipments of chemicals and allied products. C&EN also estimates a 5.3% increase in the value of industrial chemical shipments to some $184.3 billion. This is considerably better than 1996 when shipments of chemicals and allied products rose only 3.9% and those of industrial chemicals actually fell about 1.3%.

Chemical employment starting to rebound

Chemical employment
graph

Note: Seasonally adjusted.
Source: Bureau of Labor Statistics

Polymer production has been a mixed bag of ups and downs this year. According to statistics from the Society of the Plastics Industry, shipments and captive use of total plastic resins through the first nine months of this year-the latest data available-have totaled some 60.2 billion lb, up 3.6% from the same period last year.

And thermoplastic demand has grown slightly less-3.3%-to 53.7 billion lb. Production of thermoplastics, however, has increased 5.5% to 56.4 billion lb, indicating growing inventories through the first three quarters.

Of the large-volume thermoplastics, only a few have shown decent growth in the first nine months. Demand for polypropylene has grown 7.5% to 9.74 billion lb. Polystyrene demand has increased 5.6% to 4.88 billion lb. Demand for polyvinyl chloride has risen 5.5% to 10.6 billion lb. And linear low-density polyethylene demand has grown 3.4% to 6.17 billion lb. But demand for low-density polyethylene has dropped 1.6% to 5.91 billion lb and for high-density polyethylene has declined 1.0% to 10.0 billion lb.

Of the two thermosetting resins for which comparable year-to-year data are presented-epoxy and polyester-only polyester shows good growth-6.6% to 1.27 billion lb.

Shipments of synthetic fibers through the first nine months grew 4.6% to 6.54 billion lb. Of the major fibers, only nylon showed a decline during the period, with shipments decreasing 1.1% to 1.86 billion lb. For this fiber, a 3.6% gain in demand for nylon yarn to 1.32 billion lb was more than wiped out by an 11.2% decline in shipments of staple and tow.

Polyester, however, had an 8.5% increase in total shipments to 2.69 billion lb, with yarn and monofilament up 3.7% to 1.07 billion lb and demand for the chopped form up 12.0% to 1.62 billion lb. Demand for olefin fiber was up 6.7% to a total 1.69 billion lb, while acrylic and modacrylic continued to decline, falling 2.3% to 300.5 million lb.

Like plastics, however, fiber inventories have increased during the year.

Foreign trade has been a surprise this year. After export growth of only 2% for chemicals in 1996, and despite the strong dollar this year, exports should increase some 10.4% by year-end to finish at a total of $69.5 billion. And imports, which increased 11.1% last year, should finish this year with only slightly faster growth of 11.5% to $50.0 billion. Thus, the chemical trade surplus likely will swell another 7.8% or so this year to $19.5 billion.

Next year, however, may be a slightly different story for the chemical industry. Being highly cyclical, the industry-as noted often and everywhere-is closely tied to growth of gross domestic product. And unfortunately, GDP probably will not repeat its performance of 1997. The Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters for the fourth quarter of this year puts GDP growth for the year, because of what it calls a "surprisingly robust third quarter," at 3.7% over 1996. However, the survey predicts a much lower 2.6% growth in GDP for next year.

Overal trade deficit rises once more...

Trade deficit graph

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

...as chemical trade surplus grows

Chemical trade surplus
graphic

There are few signs of a business slowdown next year-at least in the first half. The Index of Leading Economic Indicators, now compiled by the Conference Board, has been increasing for five consecutive months. And the report of the Philadelphia Fed forecasters says, "Although the risk of a decline in GDP rises over [the four quarters of next year], to 19% in the fourth quarter of 1998-the risks are about three percentage points lower than those assigned in the last [third quarter's] survey."

And the survey forecasts that consumer price inflation, which is usually higher than that for producer prices, will grow at 2.6% in 1998, compared with just 2.0% this year.

Thus pegging the chemical industry performance to these two benchmarks, C&EN forecasts that production of chemicals and allied products should grow some 2.6% next year, while that of industrial chemicals may actually grow a hair faster at 2.7%.

Prices, however, should be up about 1.0% for the broad chemicals category, but only about 0.7% for industrial chemicals.

Shipments of chemicals and allied products should grow another 1.7% next year, coming in at about $408 billion. And demand for industrial chemicals will rise 3.4% to about $200 billion.

This forecast may be slightly optimistic, however, because of the implications of foreign trade. In its annual "U.S. Industry Performance and Outlook Survey," the Chemical Manufacturers Association (CMA) notes that the response of surveyed chemical companies projects a 5.0% increase in exports next year. However, since this survey was done during the collapse of currencies in the Asia-Pacific region, the responses may have been somewhat optimistic.



TOTAL U.S. EXPORTS GREW SLIGHTLY MORE THAN IMPORTS THIS YEAR





ALL CATEGORIES PARTICIPATED IN STRONG GROWTH OF CHEMICAL EXPORTS




The cheaper currencies there will have a dual effect. First, products from countries such as Indonesia, Thailand, South Korea, and others will be cheaper in U.S. dollars, perhaps increasing imports into the U.S. And exports from the U.S. to those regions may likely drop as currency dries up.

If the region goes into some sort of trade recession, it could spread around the world, affecting not only the U.S., but also Europe. A trade war might not result, but it would be unpleasant.

There is good news in the CMA survey. Companies surveyed see growth in feedstock costs cut in half from this year. For 1997, they project that feedstock unit costs will climb 2.0%, but are forecasting a 1.0% rise next year. And they see the same situation for energy costs relating to fuel and power-a 2.0% increase this year and a 1.0% rise next year.

Everybody knows that wages will increase: There was 100% unanimity in the survey. And perhaps reflecting the tight labor market, hourly production wages are forecast to rise 3.3% in 1998 following a 3.0% increase this year.

Another piece of good news for the chemical workforce is that employment may finally have bottomed out. Having reached an annual average high of 1,086,000 people employed in chemicals and allied products in 1990, this has dropped steadily to where, by the time all the data are in this year, there will be an average 1,026,000 chemical employees. If it has bottomed out, the bottom came in July, when there were just 1,023,000 chemical employees: The employment rolls have increased each month after that to November's 1,029,000.

And the CMA survey projects that there will be no further falloff next year, but a weighted average of responses gives an employment increase of 0.3%. Not much, but it is an increase and it would mean more than 3,000 new jobs.

However, of the companies with more than $1 billion in sales that responded to the survey, 30.6% still see employment cuts for 1998.

The survey also forecasts increases in both spending on new plants and equipment and on research and development.

Thus, the outlook for the U.S. chemical industry for next year almost promises to be good. Sales should increase, costs should be held in check-in most cases lower than inflation, although prices may rise a bit. In other words, moderate growth in the economy will mean moderate growth for chemicals, assuming there is not a complete collapse in global trade due to the crisis in Asia.


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