business
CHEMICAL CAPITAL SPENDING TO RISE Global investment in plants and equipment by U.S. firms gets hefty 10% increase for 1997 after modest boost in 1996 Marc S. Reisch C&EN Northeast News Bureau
E
ven as chemical industry sales slow, earnings decline, and profitability wanes, industry capital spending is headed for double-digit increases in 1997, according to C&EN's annual survey of significant chemical producers. All but one of 19 major companies C&EN just polled plan to increase worldwide capital spending in 1997 an average of 10% from 1996, to $7.2 billion. Dow Chemical, the largest U.S. chemical producer, was unable to supply a capital spending figure at this time. However, of the 18 large- and medium-sized chemical companies that could supply 1997 spending projections, 12 said they plan at least double-digit increases, ranging from 11 to 143%. The rest plan more modest increases, no increases, or significant decreases from 1996 capital spending. All 19 companies estimate that their plant and equipment spending this year increased an average of 5% from 1995 to a total of nearly $8 billion. The last time spending levels for the group of companies was so high was in 1992. But between 1992 and 1995, the 19 companies collectively decreased capital spending from almost $8 billion to $7.6 billion. A subset of 10 of these chemical producers was also able to break out spending plans for the U.S., and they say they will increase capital spending in this country an average of nearly 7% to $1.1 billion in 1997. U.S. spending for this group accounts for nearly 61% of the group's worldwide capital spending. One other survey of chemical industry capital spending plans suggests that most producers intend to increase their spending on new plants and equipment in 1997 and in 1998. The Chemical Manufacturers Association (CMA) conducted the survey a few months ago, and it shows respondents plan collectively to increase capital spending 5% in both 1997 and 1998. 10 DECEMBER 23, 1996 C&EN
Close to 80 companies responded to the CMA survey, mailed in September to 190 members. The group, which represents major commodity chemicals producers, reports that expenditures rose almost 8% in 1996. In the 1996-98 period, about three-quarters of the CMA survey respondents plan increases in their spending levels. However, the number of those expecting to spend at the same level in each of the three years as in the prior year slowly rises from about 12% in 1996 to 14% in 1997 and nearly 20% in 1998. The number of survey respondents that expect to decrease spending slowly declines from 22% in 1996 to 19% in 1997 and 16% in 1998. CMA's survey also suggests that multinational firms will increase the percentage of their investments in fast-growing developing countries of Asia and Latin America, and investments in the U.S. and Europe will take a smaller percentage. Whereas 71% of capital investments shored up and expanded CMA members' U.S. operations in 1996, the survey showed only 62% of
investments would be devoted to U.S. projects in 2001. Both C&EN's and CMA's surveys suggest that chemical producers will continue to add new plants and equipment. Manufacturers continue to make investments, although the economy has slowed and so has demand for some petrochemicals. And they continue their investment although economic conditions have changed recently. For instance, sales declined 2% and earnings fell 9% in this year's third quarter for the group of 30 major chemical companies that C&EN surveys (C&EN, Nov. 18, page 12). From January through the end of September, sales dropped 1% and earnings slid 7% for the same group of companies. Two driving forces continue to propel most industry capital spending, according to Alexander P. Paris, an economist at investment brokerage firm Barrington Research Associates, Chicago. First, manufacturing companies continue to cut costs because they cannot easily raise prices. As they cut costs, they invest in new equipment to lower the unit cost of their products. Second, as global competition increases, companies again must invest in state-of-the-art equipment to lower their production costs. For instance, says Paris, automakers continue to pressure suppliers to increase the quality of their products, to supply products on a world basis, to spend money on their manufacturing facilities to meet the high expectations of automakers, and to do it all at as low a cost as possible. To do otherwise would mean losing a substantial amount of business. Paint and coat-
In 1996, Air Products brought a new emulsion reactor on-line at a facility in Mexico.
sion as C&EN defines it, Arco includes the Olin purchase as a capital expansion in a Chemical capital spending . . . but will not change recent discussion it published on its capiwill grow next year . . . as a percentage of sales tal spending program. Thus, for C&EN's discussion of capital spending, Arco $ Billions Percent Chemical's spending in 1996 is $185 mil7 111 lion and not $750 million. Although with the adjustment to Arco's 10 6 numbers, the company shows a 5% drop in capital expenditures from 1995 to 1996, 9 Arco has slated a 143% increase in 1997, 5 the largest percentage increase in C&EN's survey. Arco plans to spend $450 million 8 in 1997 as part of afive-year,$2.6 billion 4 capital expansion program that the com7 pany says is aimed at expanding its core urethanes and performance chemicals Ol businesses. Projects include expansion of a ! a a 1987 88 89 90 91 92 93 94 95 96 97 1987 88 89 90 91 92 93 94 95 96 97 propylene oxide, styrene, and butanediol Note: Combined data from 16 major chemical producers listed in the table on page 12. Excludes Arco Chemical, Dow at Channelview, Texas, and the construcChemical, and Eastman Chemical, because 10 years of data are not available, a C&EN estimate. tion of a grassroots propylene oxide, styrene, and butanediol facility in Rotterdam, ings suppliers, adhesives manufacturers, area for investment, especially for nearby the Netherlands. Arco says 30% of the total capital budget will pay for environmenand plastics suppliers experience the same U.S. companies. pressures from the automakers that manuListner suspects that sometimes com- tal, health and safety, infrastructure mainfacturers of electronics, carburetors, and panies "might look at acquisitions as an tenance, and administrative costs. According to CMA, chemical companies brake assemblies experience. alternative to capital spending." Many Besides the pressures to meet custom- large companies have reduced their num- now spend about 11% of new capital exers' quality and price demands, many ber of employees, closed older plants, and penditures for pollution abatement and conchemical companies have made capital rationalized capacity. An acquisition can trol. It sets total chemical industry pollution spending plans and started projects they help avoid the build-and-bust scenario be- abatement spending at $4.6 billion in 1994, cannot just stop immediately as the econ- cause an acquisition may provide the the latest year for which data are available, omy slows, says Fred Peterson, president means to acquire new capacity and new versus $3.1 billion in 1988. Although the of chemical industry consultants at Probe business without adding to overall market money spent on pollution abatement does Economics, Millwood, N.Y. "Many chemi- capacity and industry employment. not improve the chemical industry's botcal companies had good profits in 1994 Arco Chemical is one company that tom line, its societal benefits are considerand 1995—and into the first part of 1996," looked toward acquisitions to expand its able, according to CMA. The association's points out Peterson. With those profits in business presence in a new market with- members have reduced air emissions, surhand, many committed to capital expan- out building new capacity. Earlier this face-water discharges, and releases to land sion projects they "may not want at the year, it purchased Olin's isocyanates busi- from 573 million lb in 1988 to 265 million moment, but construction in many cases ness for $565 million. Although the pur- lb in 1994—-a 12% average annual decline. has already started." And once chemical chase does not qualify as a capital expanEven though chemical companies recompanies start construction, Peterson sponding to C&EN's survey says, it takes a while to spend the money expect to increase their capicommitted to the project. tal expenditures an average Ten producers plan average 7% of 10% in 1997, C&EN Chem Listner, a senior vice president increase in U.S. capital spending projects that spending as a with industry consultants Kline & Co., percentage of sales will reFairfield, N.J., says many large companies 1997 1996 a main at 7.9%—the same level are spending money on the value-added $ Millions U.S. Total U.S. Total as in 1996. That level is conside of their business rather than on the $ 90 $ 78 $ 100 $ 87 Albemarle commodity side of their business. "It siderably below the last high 105 53 80 56 Betz Laboratories makes sense to spend money in such of 10.4% in 1990, but not as 24 55 33 Crompton & Knowles 39 value-added businesses as electronic low as the 10-year low in Ethyl 48 38 33 26 chemicals, water treatment chemicals, 1994 of 7.2%. So although W.R. Grace 450 200 325 150 and surfactants, as well as intermediates some may believe the indus150 60 Hercules 100 40 for pharmaceuticals"—all still hot growth try overall is heading into 100 60 Lubrizol 95 59 areas. another build-and-bust cyMorton International0 216 151 241 191 In addition, Asia continues to "capture cle, spending levels are not 105 56 Nalco 95 51 people's imagination and boards of direc500 325 PPG Industries 475 300 anywhere near their recent tors' interest," says Listner. As a result, highs by this measure. TOTAL $1,673 $985 $1,729 $1,053 many companies continue to invest in Of the 18 companies ina December 1996. b Budget for 1997. c Fiscal year ends June 30. countries such as China, Singapore, and cluded in this year's survey India. Latin America is also an attractive of 1997 expenditures, 83% b
DECEMBER 23, 1996 C&EN
11
business Major chemical producers plan 10% global capital spending increase in 1997 Total worldwide
%change
1995-96 d
1996-97 e
9% -20 -5 25 117
5% 11 143 31 41
1992
1993
1994
1995
1996a
1996b
1997c
$ 428 100 295 74 13
$ 491 88 181 63 14
$ 611 70 186 55 22
$ 870 112 195 64 18
$1,000 113 280 80 18
$ 951 90 185 80 39
$1,000 100 450 105 55
1,595 2,616 467 57 45
1,397 1,996 368 117 44
1,183 1,575 281 141 60
1,417 1,775 446 45 50
1,200 1,700 na 35 60
1,400 2,000 750 33 50
na 2,000 850 48 63
-1 13 68 -27 0
na 0 13 45 26
W.R. Grace Hercules Lubrizol Monsanto Morton International1
398 150 96 586 200
310 149 128 437 201
445 164 161 409 220
538 117 189 500 252
500 130 150 na 233
450 100 95 550 216
325 150 100 650 241
-16 -15 -50 10 -14
-28 50 5 18 12
Nalco Occidental Chemical Olin PPG Industries
131 259 173 283
118 166 132 293
126 190 149 356
127 243 201 448
115 225 170 500
95 250 145 475
105 313 130 500
-25 3 -28 6
11 25 -10 5
$7,966 -8%
$6,693 -16%
$6,404 -4%
$7,607 19%
nm nm
$7,954 5%
$7,185 10%
$ Millions
Air Products* Albemarle Arco Chemical Betz Laboratories Crompton & Knowles9 Dow Chemical DuPonth Eastman Chemical Ethyl' Ferro
TOTAL ANNUAL CHANGEk
5%
—
10%
—
a December 1995 estimates, b December 1996 estimates, c Budget for 1997. d From 1995 actual to December 1996 estimate, e From December 1996 estimate to 1997 budget. f Fiscal year ends Sept. 30. g Data for 1996 and 1997 include Uniroyal Chemical, which was acquired in August 1996. h Excludes Conoco, i All figures restated to reflect spin-off of Albemarle in February 1994. j Fiscal year ends June 30. k For reporting companies, na = not available, nm = not meaningful.
plan to increase spending. Arco's large increase of 143% is followed by Hercules' 50% increase to $150 million. A spokeswoman for the company says projects overseas account for a large part of Hercules' 1997 capital budget. Ethyl plans a 45% capital spending increase to $48 million in 1997 for what it calls "supply-chain improvements." Like many other companies mrnishing projections at this time of the year, Ethyl is not ready to discuss specific projects, although it has made a commitment to certain production improvement goals and thus expects to increase spending. Another company expecting to significantly increase capital expenditures in 1997 is Crompton & Knowles. Although the company's 1997 41% increase is notable, it follows a 117% increase in 1996. Crompton's 1996 and 1997 figures, however, include Uniroyal Chemical, which Crompton acquired in August. Capital spending figures for years before 1996 have not been restated. Without Uniroyal, Crompton's 1996 capital expenditures would have been $15 million, and thus its expenditures would have declined 17% compared with 1995. Other producers planning double-digit 12
DECEMBER 23, 1996 C&EN
increases include Betz Laboratories, up 31% to $105 million; Ferro, up 26% to $63 million; and Occidental Chemical, up 25% to $313 million. Monsanto showed the next largest improvement, up 18% to $650 million. The Monsantofigureincludes the two entities that will become separate life sciences and chemical companies sometime next year (C&EN, Dec. 16, page 9). Eastman Chemical plans a 13% increase to $850 million, and both Albemarle and Nalco plan 11% increases to $100 million and $105 million, respectively. Only three European-based chemical producers could provide some spending information on their 1996 or 1997 capital spending plans this year. Last year, six producers provided information. Missing this year are BASF, Lonza, and Rhone-Poulenc. Spokesmen for these companies said planners still had not made their final decisions, suggesting that a slowing economy in Europe and the U.S. is holding up decision-making at the big chemical makers. Only Hoechst and Degussa, both based in Germany, could provide worldwide capital spending numbers for 1996 and 1997. Hoechst will spend the same amount—$2.3 billion—on capital and equipment improvements in 1997 as in
1996. Degussa will increase worldwide spending by 16% to $439 million in 1997. A spokesman for the company says the increase is due in part to the construction of a new hydrogen peroxide plant in Brazil. Bayer, also based in Germany, would only say it spent $2.3 billion worldwide in 1996 but would "spend more" than that in 1997. Only one European producer would say what its capital expenditure plans in North America were in 1996 and would be in 1997. Degussa set its 1997 spending target at $78 million for the U.S., Canada, and Mexico, unchanged from 1996. Degussa is more readily able to supply spending figures now—unlike other European producers— because itsfiscalyear ended Sept. 30. As a result, it has already completed the yearly planning ritual that its competitors on a calendar year are now going through. U.S. and European chemical producers may further refine their 1997 spending plans in the months ahead, but most have committed themselves to increased spending, especially in specialty areas. Those who have not increased spending plan to hold the line, and very few expect to decrease their investments in the new equipment and plants they need to remain competitive.^
