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  Cover Story  
  January 10,  2005
Volume 83, Number 2
pp. 16-18

Last year was kind to the U.S. chemical industry; 2005 should provide further growth


The year just ended was the one the chemical industry has been waiting for since about 2000. Perhaps most important, there were no national or international shocks to slow the economy and, thus, demand for chemicals. In fact, the biggest event was probably the rapidly rising price of oil. But because most U.S. petrochemicals use natural gas feedstocks, in the latter half of the year the U.S. began to enjoy a competitive advantage over other countries' chemical costs as the price of natural gas began to level off while the price of oil kept rising.

And although U.S. chemical companies may not have been able to increase prices to the point of completely offsetting the rising feedstock costs, they were able to raise them substantially. This, combined with improvements in many other facets of the chemical economy, was enough to make 2004 a banner year in sales and profit growth.

Through the first nine months of 2004, total earnings from operations at 26 companies surveyed by C&EN increased 64.9% over the same period in 2003 to $7.41 billion as sales increased 14.4% to $110.4 billion. Thus, the aggregate profit margin for the group increased to 6.7% for the nine months from just 4.7% in the comparable period of 2003. Although this measure of profitability is still well below the 8%-plus levels of the late 1990s and into early 2000, it is still well above what margins have been since the turn of the century.

Economists say that, in addition to the increase in product prices this past year, profits have been boosted by lower employment levels and payrolls, increased productivity, rising demand, and the declining value of the dollar against other currencies.

The lower dollar value is so important that a panel of forecasters for the National Association for Business Economics (NABE), in a report issued in November, called it "the most important element that might serve to reduce the U.S. current account deficit." The current account is a record of a country's transactions with the rest of the world, and the U.S.'s growing deficit has caused concern among many economists who predict that it may well cause increased inflation and reduce U.S. gross domestic product.

Although the weaker dollar might have an effect on the overall economy, in the past few months it certainly seems to have had an effect on foreign trade of U.S. chemicals, which has been running an annual deficit since 2002 and sporadic monthly deficits for even longer.

Through the first eight months of 2004, the chemical industry ran a trade deficit totaling $1.10 billion. Then came September. Exports of chemicals rose 1.4% from the previous month to $9.39 billion, while imports plummeted 12% to just $8.80 billion. The result was a $587 million trade surplus for the month, the largest monthly surplus since March 2001, when it was $667 million.

This was followed by an October in which imports recovered 6.2% to $9.34 billion and exports rose another 6.3% for another monthly surplus, of $640 million. Thus, based on the 10-month data, the chemical deficit for all of 2004 should be somewhere around $3.88 billion. This, however, is a very soft forecast given the volatility of the trade data. It is not unusual to see large swings, especially in the monthly import data. In fact, the swings in the balance can approach or even exceed $1 billion, as seen in the spring of last year when the chemical trade balance changed from a deficit of $1.13 billion in April to a $251 million surplus in May.

While the volatility may persist into 2005, especially in the pharmaceutical and inorganic sectors, the upward trend in exports should continue, especially in light of forecasts that see little appreciation of the dollar's value, especially against the euro. This dollar-euro comparison will also make foreign chemicals more expensive, thus cutting into import growth.

This prospect is shown in forecasts from the American Chemistry Council (ACC). In its outlook for 2005, the trade association predicts that both export and import growth will slow from those of 2004, but export growth of 13% will still outpace that of imports, which is expected to be less than 12%. Thus, the deficit will narrow by some 20%. In fact, according to Kevin Swift, chief economist at ACC, if the dollar gets to $1.50 to the euro, the U.S. chemical trade balance will return to a surplus in 2006.

Demand for U.S. exports should also grow due to the competitive advantage that has developed for natural gas feedstocks, used more by U.S. producers, over oil-based feedstocks, which predominate in Europe. During the first 11 months of 2004, this advantage for natural gas has ranged between a low of 11 cents per million Btu in January to $3.60 per million Btu in October.

It's not just trade that will grow in 2005. Predictions are for continued economic improvement in the U.S., and this growth will take chemicals along with it. The NABE survey predicts 2005 GDP growth of 3.5% in the first quarter, 3.6% in the second quarter, and 3.5% in the third and fourth quarters. The Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters is pretty much in line with NABE's, predicting 3.4% real GDP growth in each of the quarters this year, ending with a cumulative 3.5% increase for the year.

The NABE survey predicts inflation in the Consumer Price Index, excluding food and energy--the so-called core rate--of slightly more than 2% this year. ACC's assessment falls in line with this outlook, seeing inflation of 2.1% in 2005. The Survey of Professional Forecasters sees 2.2% inflation this year, down from an estimated 3.4% in 2004.

The Institute for Supply Management says U.S. economic growth will strengthen in 2005. "Expectations for 2005 are higher in both the manufacturing and nonmanufacturing sectors, and both sectors are more optimistic about the coming year than they were one year ago for 2004," ISM says. For all manufacturing sectors of the economy, ISM sees higher revenues, continued growth in new orders and production, and rising employment.

Increases in chemical production were certainly hallmarks of the industry in 2004. Output of all chemicals was up about 5.3% from 2003 to an index of 111.2 (1997 = 100). Production in the basic chemical sector lagged somewhat, rising a still respectable 3.9% from the prior year. Above-average growth was seen in pharmaceuticals, which rose 5.8%; plastics, rubber, and fibers, which were up 5.4%; and paints, coatings, and adhesives, also up 5.4%. But the real star for once was the agricultural chemicals sector, where output increased 7.4%.


MEANWHILE, prices for chemical products soared as producers tried to keep up with rising raw material costs. Prices for all chemicals, based on Department of Labor data, increased 7.6%, while the price index for industrial chemicals jumped 14.8%.

Industrial chemical price increases were led by basic organic chemicals--products such as ethylene, propylene, and, especially, benzene. The average index for this group rose 17.9% over 2003. Plastics prices also enjoyed a resurgence, increasing 9.8%.

The result of production and price rises was a big increase in the value of chemical shipments for the year. Shipments of all chemicals totaled about $506.5 billion in 2004, a 10.6% rise over the year before. Excluding pharmaceuticals, the shipments' value for the remainder of the industry was about $390.5 billion, a gain of some 13.6%.

At the same time, the chemical industry was able to contain its inventories. The inventories-to-shipments ratio for all chemicals began the year at 1.33, holding that level through much of the year. (The ratio represents the number of months' shipments contained in inventory.) Excluding pharmaceuticals, inventories were very tight, however. The ratio when pharmaceuticals are not counted began 2004 at 1.05 and stood at just 1.00 for much of the rest of the year.

For this year, however, the outlook is for moderation in practically all aspects of the chemical industry. U.S. chemical production should increase about 3.4% after the 5.3% increase seen in 2004. And prices will be up some 4.5% instead of the 7.6% seen last year.

This will mean slowing, but still respectable, growth in the value of shipments. ACC predicts that chemical shipments in 2005 will rise almost 6% from last year to about $535.5 billion.

Employment in the chemical industry has caused concern for many as it has trended down over the past few years. But even with the recovery, it doesn't seem as if the job picture will get much brighter.

Labor Department data show that total employment in the chemical industry has fallen each year since the end of 1998 when it stood at 982,500. By 2003, there were just 907,900 employees; for 2004, there was another drop to about 891,000 at year-end. The ACC survey sees this decline continuing through 2006. "The long-term trend is for employment to continue to decline, though much more gradually than in the past few years," the survey says.

What is growing, however, is the number of hourly production workers as output at chemical plants increases. Ending 2003 at 520,700, the number of hourly production workers stood at 523,500 by November 2004. This trend undoubtedly will continue into 2005 as chemical production keeps rising.

Based on production data from the Federal Reserve Board and employment data from the Labor Department, C&EN estimates that labor productivity rose 5.1% in 2005. The increase in labor productivity continues a long-term trend that goes back 10 years or more.

But the real boon came in unit labor costs--the cost of labor per unit of output. The ideal situation is for unit labor costs to decline as productivity increases, which seems to occur only about every other year. And in 2004, while productivity was increasing 5.1%, unit labor costs fell 1.4%. Although this doesn't seem like much, the overall trend in unit labor costs has been down, and in 2004 this measure was 12.9% below the 10-year high seen in 1996.

There is little doubt that productivity will increase again in 2005 as chemical companies continue to focus on employment. Unit labor costs, however, may well increase slightly once more.

But that will be a small price to pay for another year of good, if more moderate, industry growth.


  Chemical & Engineering News
ISSN 0009-2347
Copyright © 2004


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