BUSINESS
Chemical Producers Plan Only Modest Increase In Capital Spending In '96 • C&ENfinds limited annual increase in global investments in plants and equipment, but firms are cautiously optimistic Marc S. Reisch C&EN Northeast News Bureau &EN's just-completed annual survey of significant chemical producers shows they plan modest increases in capital spending next year. A mix of 20 large- and medium-sized chemical companies surveyed by C&EN plans to increase worldwide capital spending in 1996 an average of 6% from 1995 to $7.6 billion. Nine of them plan double-digit increases, ranging from 11 to 47%. Others, however, plan only modest increases, no increases, or significant decreases from 1995 capital spending. The companies in the survey estimate that their plant and equipment spending this year increased an average of 11% from 1994 to a total of $7.1 billion. Between 1991 and 1994, the 20 companies collectively decreased capital spending from $8.1 billion to $6.4 billion. A subset of 11 of these chemical producers also broke out spending plans for the U.S. and say they will increase capital spending in the U.S. an average of 10% to $2.3 billion in 1996. U.S. spending for the group accounts for nearly 70% of their worldwide capital spending. Two other surveys of chemical industry capital-spending plans also indicate that most producers plan to increase their spending on new plants and equipment in 1996. Surveys from the Chemical Manufacturers Association (CMA) and the Synthetic Organic Chemical Manufacturers Association (SOCMA), conducted a few months ago as economic activity in the U.S. peaked, show respondents plan sizable increases in spending.
C
Ethyl product supply manager Kang Buoy reviews blueprints for a Houston lubricant additives plant completed in first-half 1995. More than 90 custom chemical proAbout 80 companies responded to the CMA survey, mailed in September ducers, the bulk of which generally to 185 members. The group, represent- have annual sales of less than $50 miling major commodity chemical pro- lion, responded to SOCMA's late-Sepducers, report that they plan a 22% in- tember survey. About 66% of the comcrease in expenditures in 1996, on top panies plan to increase their 1996 capiof a 40% average increase in spending levels this year. Three-quarters U.S. capital spending for several of the respondents plan chemical producers to rise 10% to increase their spend1996 1995 ing levels in 1996, comU.S. Total U.S. Total $ Millions pared with 11% who plan no change in capi$ 100 $ 75 $ 113 $ 88 Albemarle tal expenditures and 80 56 50 65 Betz Laboratories 18 13 14% who plan a de13 19 Crompton & Knowles 900 700 1,200 1,100 crease in spending. AvDow Chemical 28 35 35 43 Ethyl erage spending increas295 500 250 480 W.R. Grace es, according to CMA, 95 150 120 185 Lubrizol are weighted to provide 200 233 225 252 Morton International0 results according to 115 70 75 115 Nalco company sales. Thus, 500 300 300 450 PPG Industries smaller companies, with 280 400 270 400 Rohm and Haas smaller capital budgets, $3,209 $2,113 $3,344 $2,325 TOTAL do not have a dispropora December 1995. b Budget for 1996. c iscal year driàs June 30. tionate impact on the spending survey. a
b
z
DECEMBER 18,1995 C&EN
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BUSINESS tal expenditure budgets, of which nearly half plan a more than 10% increase over 1995 spending. About 70% of the respondents increased capital spending this year compared with last. All three surveys indicate that chemical producers, from large to small, are fairly sanguine about their prospects, although C&EN's more recent survey suggests many companies are taking a more cautious approach to capital spending with the slowing of the U.S. economy. Fred Peterson, president of chemical industry consultants Probe Economics, Millwood, N.Y., says: "Chemical producers made a lot of money this year, and it could be burning a hole in their pockets, so they've decided to build.,/ But he thinks producers who plan to spend a lot of money in the next year may soon scale back their plans. High commodity chemical prices earlier this year have already come down—and as prices decline, capital budgets will shrink, he says. Chemical stock analyst Paul K. Raman, vice president of investment banking company S. G. Warburg, thinks industry capacity growth plans now are in line with need in the U.S. He predicts 2% growth for U.S. chemical capacity in 1996 and 3% in 1997. He adds that European chemical capacity should grow only at a rate of 1.5% in 1996 and 1997—a pace too slow to accommodate demand. And, Raman continues, chemi-
Chemical capital spending will inch up next year . . .
.. · but will remain low as a percentage of sales
$ Billions 9
Percent
A
8
\
\ - . iiliillliei^^Se
^
4
6
I ! I I i I I i 1 0 1986 87 88 89 90 91 92 93 94 95a 96a
0 1986 87 88 89 90 91 92 93 94 95a 96a
Note: Combined data from 18 major chemical producers listed in the table on the facing page. Excludes Arco Chemical and Praxair because 10 years of data are not available, a C&EN estimate.
cal producers will have to spend more money to keep up with European chemical demand. However, says Raman, the torrid pace of new investments in the developing countries of Southeast Asia may outstrip the need for new chemical capacity. He projects that chemical capacity in Southeast Asia will grow at an annual rate of 9% in 1996 and 4% in 1997. Perhaps, says Raman, producers should think of cutting back their investments in Southeast Asia about 30%. Taking a broader view of all types of
Five big European chemical companies—BASF, Bayer, Degussa, Hoechst, and Lonza—plan to boost their average U.S. capital expenditures by 16% in 1996 compared with 1995. As European markets and chemical profits recover following the recent recession, European chemical producers have loosened the purse strings of their U.S. operations. Indeed, some see more growth opportunities outside Europe than they do inside. Last year at this time, the European producers could provide an indication of their worldwide capital spending programs. This year, only two could estimate worldwide spending. Degussa plans a 22% worldwide spending increase to $429 million. Rhône-Poulenc, which provided no U.S. data and therefore is not in the table in this box, plans to spend the same amount worldwide in 1996 as it spent in 1995: about $1.2 billion. Of the five European-based producers which provided capital spending forecasts for U.S. operations, four plan double-digit increases and only one plans no change. After reducing capital spending 1% in 1995 compared DECEMBER 18,1995 C&EN
J \ /
J
European-based chemical producers are optimistic about U.S. capital spending
14
A
10
/ V / v^
8
capital expenditures, Alexander P. Paris, an economist at investment brokerage firm Barrington Research Associates, Barrington, 111., notes the U.S. economy has been slowing down, and as a result, so too will capital expenditures. Still, says Paris, purchases of industrial equipment have been running at about 5% above 1994 levels. Purchases of technology equipment, such as process controls and software, have been running at about 11% above last year. Both types of equipment purchases should slow in 1996, but purchases
% change
U.S.
BASF Bayer Degussaab Hoechst Celanese 3 Lonza TOTAL ANNUAL CHANGE
1996
1995
$ Militons
$
350
$
500
530 69 500 30
600 79 500 40
$1,479
$1,719
0°/c
16%
1994-95
1995-96
-1% 0 6 0 0 0%
43% 13 14 0 33 16%
—
—
a U.S. data includes Mexico and Canada, b Fiscal year ends Sept 30.
with the year earlier, BASF plans the heftiest increase in 1996,43%, with $500 million slated for capital spending. Nor did Lonza and Bayer increase capital expenditures in 1995, but in 1996 they plan considerable increases. Lonza will boost spending levels 33% to $40 million, and Bayer will increase its budget 13% to $600 million. Degussa, which increased spending a modest 6% in 1995, now will up its spending plans 14% to $79 million in 1996. Only one company, Hoechst Celanese, the U.S.-based affiliate of German-based Hoechst, plans to spend the same amount in 1996 as it did in 1995: $500 million.
Surveyed chemical producers plan 6% increase in capital spending for 1996 Total worldwide % change 1994-95d
1995-96e
47% 43 2 18 -14
11% 13 47 23 -5
1991
1992
1993
1994
1995a
1995b
1996e
$ 506 125 435 58 11
$ 428 100 295 74 13
$ 491 88 181 63 14
$ 611 70 186 55 22
$ 700 95 na 75 25
$ 900 100 190 65 19
$1,000 113 280 80 18
1,908 2,526 41 39 447
1,595 2,616 57 45 398
1,397 1,996 117 44 310
1,183 1,575 141 60 445
1,200 1,650 50 65 na
1,100 1,700 43 53 480
1,200 1,700 35 60 500
-7 8 -70 -12 8
-19 13 4
Hercules Lubrizol Morton International1 Nalco Occidental Chemical
215 82 164 137 234
150 96 200 131 259
149 128 201 118 166
164 161 220 126 190
155 155 252 110 190
100 185 252 115 225
130 150 233 115 225
-39 15 15 -9 18
30 -19 -8 0 0
Olin Petrolite' PPG Industries Praxair Rohm and Haas
177 22 335 417 265
173 18 283 333 283
132 19 293 240 382
149 22 356 326 339
160 25 500 475 400
195 13 450 550 400
170 15 500 650 400
31 -41 26 69 18
-13 15 11 18 0
$ Millions
Air Products* Albemarle Arco Chemical Betz Laboratories Crompton & Knowles Dow Chemical DuPont9 Ethylh Ferro W.R. Grace
TOTAL ANNUAL CHANGE
$8,144 -16%
$7,547 -7%
$6,529 -13%
$6,401 -2%
nm nm
$7,135 11%
$7,574 6%
11%
—
!
9
o
!
6%
—
a December 1994 estimates, b December 1995 estimates, c Budget for 1996. d From 1994 actual to December 1995 estimate, e From December 1995 estimate to 1996 budget. f Fiscal year ends Sept. 30. g Excludes Conoco, h Figures restated to 1991 to reflect spin-off of Albemarle on Feb. 28, 1994. i Fiscal year ends June 30. j Fiscal year ends Oct. 31. na = not available, nm = not meaningful.
of technology equipment in particular "should still be positive in 1996// says Paris. The U.S. is at a more mature stage in its business cycle than is Europe, Japan, Asia, or Latin America, says Paris. The latter two regions likely will continue to see more industrial growth and thus more demand for capital equipment as governments privatize industrial oper ations and embrace free-market sys tems. Europe, he says, will have to do more cost cutting to improve its com petitiveness in world markets. There fore, European businesses will have to invest in more capital goods to be more efficient. So despite the slowdown he predicts for the U.S., Paris says, "Glo bally, we are going through a relatively healthy capital-spending cycle." Global expansion, for instance, is be hind Arco Chemical's planned 47% in crease in 1996 capital expenditures. Among the projects the company plans is one to boost significantly production of butanediols and derivatives in Channelview, Texas. However, while business growth re mains fairly strong in the U.S. and in other regions of the world, money de voted to chemical industry capital ex pansion does not all go into increasing
chemical production. CMA estimates that more than 16% of new capital ex penditures goes to the purchase of pollu tion abatement and control equipment. Put another way, CMA places pollution control capital costs at about 3% of sales. On the other hand, total capital expen ditures are expected to be 6.8% of sales next year according to C&EN's survey. Subtracting CMA's estimate of pollution control capital costs from C&EN's spending estimate leaves only 3.8% of sales devoted to spending on process improvements and capacity expansions that have traditionally made U.S.-based chemical companies competitive. By these measures, capital expendi tures are at historically low levels. In 1990, U.S.-based chemical producers de voted roughly 8.2% of sales to produc tivity improvements. In that year, they spent about 10.9% of sales on capital ex penditures, including 2.7% of sales on pollution abatement equipment. Predicting any future event, though, can be tricky. Conditions change and so do companies' plans. For instance, in last year's survey, Hercules planned to re duce capital spending by 5% in 1995, but it ultimately reduced 1995 spending 39% to $100 million. A spokeswoman for the company explained that Hercules made
its capital-spending estimates before its strategic plan was finally in place for the year. In addition, some projects had to be delayed. In another case, Air Products & Chem icals originally predicted it would spend $700 million in 1995, but says it actually spent $900 million. So instead of the 15% increase the company planned for 1995, it actually increased its spending 47% above the year-earlier level. An Air Products spokeswoman explains that the company had more expansion op portunities than it had anticipated. These opportunities included projects in hy drogen and carbon monoxide that were too good to pass up just because they were not in the budget. Another industrial gas purveyor, Praxair, also said it spent a great deal more in 1995 than it had originally pre dicted. Instead of the 46% increase it planned for 1995, it actually increased its spending by 69%. A Praxair spokes woman says it, too, had many new op portunities in 1995. So just as spending plans changed in 1995 for a number of companies, 1996 capital spending for the 20 companies C&EN surveyed will likely change as companies react to shifts in the business cycle. Π DECEMBER 18,1995 C&EN
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