However, strong demand at home might mute the impact for U.S. companies. “I don’t think it is a given that the U.S. matches Asian movement,” Johnson says. “I would expect there will be reduced Oil prices imploded in 2014, and experts say they will decline furmargins for U.S. producers—but still very favorable margins.” ther before recovering later in 2015. The drop is a challenge to the Sergey Vasnetsov, head of strategic planning and transactions natural-gas-based petrochemical industry in the U.S., but producat LyondellBasell Industries, made a similar assessment before an ers should remain competitive versus the rest of the world. investor conference last month. It costs between 10 and 15 cents After hitting a peak of more than $105 per barrel last June, oil to make a pound of ethylene in a U.S. ethane cracker, he said, and prices dropped below $60 in December. Oversupply in the market40 to 60 cents to do so in naphtha crackers elsewhere. Lower oil place is running 700,000 bbl ahead of global demand of about 92 prices might bring costs for naphtha crackers down somewhat, but million bbl per day, according to the Ennot to North American levels. ergy Information Administration. This And the economic effect of lower oil SQUEEZE A decline in the ratio of oil to overhang, EIA says, will persist through prices should be beneficial, Vasnetsov natural gas prices crimped U.S. chemical the middle of the year, putting downpointed out, citing a rule of thumb that competitiveness in 2014. ward pressure on prices. the global economy gets a 0.2% lift in That’s good news for chemical comannual growth and a 0.5% reduction in Oil-to-natural-gas price ratio 30 panies in Asia and Europe, which make inflation for every $15 decline in oil prices. ethylene primarily from oil-based naph“If the global economy will experience tha. Most U.S. chemical makers crack higher growth and low inflation, I think 25 natural-gas-derived ethane, which has that bodes well for the chemical busibeen cheap since the shale gas boom beness,” he said. gan late last decade. But now the oil price What happens to the dozens of chemi20 decline is pinching their cost advantage. cal plant construction projects on the U.S. For example, high-cost Asian Gulf Coast depends on the length and duproducers set global prices for petroration of the oil price decline, IHS’s John15 chemical derivatives such as polyethylson observes. However, he doesn’t expect J F M A M J J A S O N D ene, notes Dewey Johnson, senior direccompanies that have started building to NOTE: Based on futures prices for West Texas Intermediate tor of market research for IHS Chemical. pull back now. Plants still at the planning oil ($ per barrel) and Henry Hub natural gas ($ per MMBtu). Lower oil prices are starting to push stage, with few costs already sunk, might SOURCES: Energy Information Administration, C&EN those prices down. be delayed.—ALEX TULLO
PETROCHEMICALS: OIL PRICE DECLINE DOESN’T FAZE U.S. PRODUCERS
RICHARD C. SMITH
U.S.: Feedstock advantage to bring steady growth in 2015 With the U.S. awash in low-cost natural gas and petroleum, the forecast for the chemical industry is bright. “The consensus is that U.S. chemical output will improve during 2015 and into the second half of the decade,” says T. Kevin Swift, chief economist at the American Chemistry Council, a trade group. Indeed, ACC expects chemical production to increase 4.0% this year, compared with 2.4% in 2014 and 3.0% for the overall U.S. economy this year. In addition, making chemicals will be more profitable in 2015. In December, for example, Dow Chemical told investors that the low cost of natural gas compared with crude oil will add $2.5 billion per year to its earnings. The shale gas revolution has turned the U.S. into a great place to make chemicals, and it’s now the key investment location for the world’s chemical companies. So far, Swift has tallied 215 new chemical projects planned by firms from around the globe, which will add up to roughly $135 billion in capital spending.
Much of it is along the U.S. Gulf Coast. What’s less clear is the strength of But shortages of material and skilled demand for consumer products, automolabor, coupled with the recent plunge in biles, and houses made with chemicals. oil prices, may put a Analysts agree that wobble into some of the export market MOVING ON UP New houses the more ambitious will be important but and cars will stoke U.S. chemical plans for expansion, question the spenddemand. cautions Michael J. ing power of weakShannon, head of ened trading partners chemicals and perforsuch as Japan, Brazil, mance technologies and Europe. Housing Chemical Lightstarts: output: vehicle at consultancy KPMG. In the U.S., signs sales: New chemical point to increased facilities won’t make consumer demand, a mark on overall thanks to a rebound NOTE: Estimated increases in 2015. capacity until about in home values and SOURCES: American Chemistry Council, 2017. In the meantime, employment rates. LMC Automotive, National Association of Home Builders the plunge in gasoline Production of light prices will help to rev vehicles in North up consumer spending, while lower energy America this year should increase by 3.0% and feedstock prices will jump-start U.S. to 17.4 million units, according to LMC manufacturing more broadly, Swift notes. Automotive, an industry forecaster. And As a result, at Dow and other U.S. firms, the National Association of Home Builders operating rates are expected to tick up sigexpects single-family home starts to jump nificantly this year. 17%.—MELODY BOMGARDNER
4%
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3%
17%
ISTOCK
COVER STORY
EUROPE: Lower oil price eases region’s woes The collapse of the global oil price to around $60 per barrel should provide some relief this year for Europe’s chemical firms, which in many markets are losing out to competitors from the Middle East and the U.S. “The lower oil price will obviously have a beneficial impact for the European chemical industry: You can see already that margins are picking up in Europe,” says Paul Hodges, chairman of U.K. consulting firm International eChem. Although margins may be improving, experts don’t anticipate a rapid rise in sales and production. “We now expect EU chemical production to grow again by 1.0% in 2015, against 1.5% foreseen earlier,” says Moncef Hadhri, chief economist for CEFIC, Europe’s largest chemical industry association.
organization. “Business with the U.S.A. is turning out to be very good.” But overall, the chemical industry in Germany is set to grow a modest 1.5% this year. Indeed, continued lackluster growth has led to a declining role for Europe in the world CONCRETE MEASURES A stronger U.S. economy will mean a pickup chemical marketplace. Acfor construction materials. cording to a report by English CONSTRUCTION: U.S. OUTLOOK IS consulting firm Oxford Economics, Europe’s share of the ROSY FOR BUILDING MATERIALS global chemical business has The market for paint and construction materials will expand in the declined from 32% in 1993 to U.S. this year as the economy gathers strength. But construction 17% in 2013 and will continue abroad is on the downswing as growth in China slows, Europe conto shrink unless the region’s tinues struggling, and parts of Latin America remain in recession. energy policy is overhauled The trade group American Chemistry Council says it is cautiously and there is a marked hike in optimistic about the U.S. housing industry, where each building R&D investment. start represents about $15,000 in chemical sales. Although finances The introduction of a “cooramong first-time home buyers remain weak, interest rates are still at dinated, competitive energy historic lows. policy” featuring a single EuACC expects new housing starts to rise by 20% in 2015 compared ropean energy market could with 2014. Overall construction, including commercial buildings and save the sector $43.5 billion infrastructure, should be up about 6.7% this year, the trade associaannually, Oxford Economtion predicts. ics states. The frustration for CEFIC and its Thomas Petti, president of Grace Construction Products, members is that agrees with ACC’s expectation that the residential and comTWO SCENARIOS Without help, European energy mercial building markets should continue to grow this year in Europe’s share of the world chemical export policy is steeped the U.S. On the other hand, he says, demand for construction market will continue to shrink. in politics and, chemicals such as concrete additives and building materials Market share, % analysts say, cosuch as waterproofing membranes will slow in the weaker Lat25 ordination will not in American economies of Venezuela, Argentina, and Brazil. 24 With moderate happen anytime Although China’s growth has slowed to the high single European shale 23 soon. digits from the double-digit rates of a few years ago, that gas development 22 and a doubling of In lieu of an country’s appetite for construction materials is “holding up R&D spending 21 energy revamp, well,” Petti says. “We’re still investing in China. We see more 20 “there is quite a construction there than anywhere else in the world.” 19 bit of restructuring Meanwhile, the outlook for the paint and coatings indus18 that has to be gone try will be rosy if the price of the oil and gas used to make raw 17 through,” Hodges materials stays low, says Phil Phillips, president of the advi16 says. “We need to sory firm Chemark Consulting Group. “Margins are healthy 15 move to more of now for paint makers,” he says. Phillips expects the U.S. mar2005 07 09 11 13 15 17 19 21 23 25 27 29 a hub-and-spoke ket for coatings used in industrial maintenance, infrastrucSOURCE: Oxford Economics/Haver Analytics kind of operation ture, and new construction to grow by 3–5% in 2015. where we focus on However, for Keith Olesen, field marketing manager at the The outlook is similar in a few areas and we make sure acrylic coating resins supplier Arkema, lower oil prices aren’t much Germany, Europe’s biggest we have the most robust value help. The U.S. petrochemical industry’s shift in recent years to lightchemical producer. “Demand chains possible. We don’t have er feedstocks means it is producing less propylene, which Arkema continues to rise in Europe, that at the moment. There’s uses to make acrylic acid. So propylene has become expensive, and our most important market quite a bit of structural and profits in his business are suffering, Olesen says. outside Germany,” says Marijn organizational change that In addition, global demand for coating resins will increase tepidly E. Dekkers, who is chairman needs to be done—and pretty as economic activity slows in China and Europe heads for a possible of Bayer and president of VCI, urgently—in the next two or recession, according to Olesen. He expects the slowdown to be tema German chemical industry three years.” —ALEX SCOTT porary, but he isn’t holding his breath as he waits for robust growth
to resume.—MARC REISCH CEN.ACS.ORG
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Last year brought a surge of deals from big pharmaceutical companies and record-high transaction volume from specialty pharma and generics firms. Industry experts expect merger-and-acquisition (M&A) activity in 2015 to be just as intense. “With reloaded cash balances, a stable-to-improving outlook for earnings growth, and historically low [interest] rates, we expect a continued aggressive M&A stance across the group,” Leerink stock analyst Seamus Fernandez told investors recently. Some M&A activity in 2014 was driven by so-called inversions, deals where the buyer targets a company based in a country with low taxes. Pfizer’s failed pursuit of AstraZeneca and AbbVie’s abandoned bid for Shire were both motivated in part by the potential for tax savings. But last fall, the U.S. government tightened the tax code, and industry watchers expect deal-making in 2015 to return to its usual focus on strategic fit. They also note that big pharma’s definition of “strategic fit” is getting narrower: Drugs that offer incremental improvements over existing therapies aren’t seeing the steady sales of the past, so firms are trying to focus instead on therapeutic areas where they can dominate through innovation, according to Patrick Flochel, head of pharmaceuticals at the consulting firm Ernst & Young. The desire for therapeutic focus is driven in part by a more abbreviated life cycle for new drugs. In the past, companies could reasonably expect a solid decade of sales for a drug before it was supplanted
ASIA: Oversupply and slower growth will hurt profit margins for region’s firms Asian producers of major industrial chemicals will struggle in 2015 as the economies of Japan and China slow. The industry will also be harmed by overcapacity in China and the global fall in oil prices. “Falling oil prices translate into decreasing prices for chemicals,” says an account manager responsible for China at Taiwan’s Formosa Plastics. “Buyers in China are delaying their purchases because they figure they can buy at a lower price later.” The manager asked not to be identified because he’s not authorized to speak for the company. Of course, a time will come when buyers in China have to rebuild their stocks, the salesman acknowledges. But profit margins in the industry will likely not improve for several months, perhaps not before the second half of 2015, he reckons. Adding to problems, the industry is struggling with capacity overbuilding in China that has been dampening margins for some time. The overexpansion hit Chinese oil and petrochemical giant Sinopec, which reported an operating loss of $560 million for the first nine months of the year. “Com-
petition from imported chemical products and the increase of newly added domestic production capacity posed a great challenge to domestic producers,” Sinopec noted at the end of October. The outlook is a little better in Japan. Companies that produce materials for the
UNEVEN Growth will pick up in Japan and India, slow in China. Nominal GDP, 2013 ($ billions)
9,240 China
4,920 1,877
Japan
1,305 South Korea
India
Change in GDP from the previous year, % 2014a 2015a
China 7.4 7.2
India Japan 5.5 0.2 6.3 1.5
South Korea 3.5 3.8
a Estimates. GDP = gross domestic product. SOURCES: Asian Development Bank, International Monetary Fund
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electronics industry, for instance, should enjoy a relatively good year. However, as in China, the outlook is poor for basic chemicals. This is partly because economic growth in Japan slowed after the government raised its consumption tax last spring. “A mood of uncertainty is growing because of fluctuations in exchange rates and crude oil prices, changes in the taxation system including the consumption tax, and concerns about rises in electricity rates,” the Japanese chemical maker Showa Denko said last month. In contrast, Asia’s third-largest economy, India, will likely be a bright spot in 2015. The Asian Development Bank expects that economic growth in India will accelerate to 6.3% in 2015 because of improved business and consumer sentiment following the election of a new government. Reliance Industries, India’s largest refiner and petrochemical producer, achieved record profits in the first half of the fiscal year that ends March 31. When releasing the results, Reliance said it expects supportive business conditions throughout 2015.—JEAN-FRANÇOIS TREMBLAY
GILEAD
by generics. Now, as insurance and other payers get tougher about what they are willing to cover, a new phenomenon has emerged. “Drugs that have been launched quite recently are all of a sudden trumped by a better drug for the same thing, and it’s the end of growth for that drug,” Flochel says. For example, Vertex Pharmaceuticals and Merck & Co. were lauded in 2011 when they each launched an innovative treatment for hepatitis C virus (HCV). But the approval of more effective drugs from Gilead Sciences has already rendered the Vertex and Merck products obsolete. And although Gilead’s HCV treatments aren’t expected to go away, their lofty sales should become more earthly following the approval last month of a new HCV pill from AbbVie. Flochel expects to see more swift rises and falls in the coming years. BLOCKBUSTER This year could also bring more pressure Gilead’s hepatitis from activist shareholders who are pushing C drug Sovaldi. companies to cut costs and improve R&D efficiency, notes Jeff Greene, head of life sciences transaction advisory services at Ernst & Young. In fact, an Ernst & Young survey found that two-thirds of biopharmaceutical executives expect to see an increase in hostile M&A in 2015.—LISA JARVIS
PHARMACEUTICALS: M&A SURGE WILL CONTINUE IN 2015
ENERKEM
COVER STORY
CLEANTECH: A PAUSE AHEAD FOR BIOBASED INDUSTRIES Although 2014 was a standout year for several renewable chemicals and fuels companies, competition from synthetics derived from cheap oil is likely to dampen enthusiasm for new projects this year. Still, experts don’t expect this pause to mark a downturn in demand for petroleum alternatives in the long run. Last year’s cleantech highlight was undoubtedly the start-up of two commercial-scale cellulosic ethanol facilities in the U.S. First was September’s grand opening of Project Liberty, a joint venture in Emmetsburg, Iowa, between corn ethanol producer Poet and Dutch specialty chemical company DSM. October brought the start-up of a similar plant in Hugoton, Kan., by Spanish energy firm Abengoa. If the cellulosic ethanol pioneers successfully scale up production, they may pave the way for a second wave of capital investment, but that is unlikely to happen soon. Factors outside their control are not favorable: Traditional fuel costs are down, and demand for transportation fuel is flat. What’s worse, the Obama Administration has delayed decisions about the quantity of biofuels that fuel blenders are required to purchase under the Renewable Fuel Standard. The potential for RFS minimums to be lowered is “very unfortunate,” says Brent Erickson, who heads the industrial and environmental section of the Biotechnology Industry Organization, a trade group. “It really hits cellulosic biofuels harder than conventional ethanol.” Last year was also supposed to be a big year for so-called drop-in biofuels. But leading contender KiOR, which had financial backing from famed venture capitalist Vinod Khosla, was unable to reach commercial-scale production of gasoline and diesel from wood. It
instead filed for bankruptcy. This year the project to watch will be in Edmonton, Alberta, where Enerkem has commissioned a largescale municipal-waste-to-chemicals facility. The plant will first produce methanol and begin making ethanol in 2016, according to Timothy J. Cesarek, the company’s head of business development. “I see 2015 being a very good year for us,” he says. “A lot of that is driven by our ability to provide a solution for the waste industry as well as for the chemicals industry.” Meanwhile, other biobased chemicals, such as biosuccinic acid and plant-based polyethylene terephthalate, will be hit hard by lower oil costs this year, cautions Meraldo Antonio, an associate at Lux Research. However, lower energy and raw material prices are good for the larger chemical industry and may have a trickle-down effect on some renewables projects, Antonio says. If leaders such as BASF, Dow Chemical, and DuPont are financially healthy, they may be willing to direct some of their profits toward alternative chemicals and materials.—MELODY BOMGARDNER TRASH TO CASH Enerkem’s
waste-to-chemicals plant is slated to start up this year.
CANADA: Companies had a great 2014, but they don’t expect a repeat performance For the first time, Canadian chemical producers last year tapped into the U.S. shale gas advantage. In 2014, Nova Chemicals’ ethylene cracker in Sarnia, Ontario, celebrated its first ethane supplies from the Marcellus Shale formation in Pennsylvania. The company had long wanted to wean itself from a naphtha diet that was increasingly making the cracker uneconomical. The new gas could allow Nova to proceed with polyethylene capacity expansion nearby. Across the country in Alberta, Nova saw the opening of a pipeline that is bringing ethane up from North Dakota’s oil-rich Bakken formation. Until 2014, ethane had been cheap but hard to come by in Canada. Low-cost U.S. natural gas meant more muted Canadian production of gas and, by extension, less ethane available for Canadian ethylene crackers. The pipelines are a long-term fix to this problem. Cheaper feedstocks and a better economy meant a banner year in 2014 for the Ca-
nadian industry. According to the Chemistry Industry Association of Canada (CIAC), sales for the country’s industrial chemical makers jumped 10% to $26.5 billion, a record level. Operating profits also rose 10% to reach an unprecedented $3.6 billion.
HANGOVER Canadian chemical makers posted record sales in 2014, but they are glum about 2015. $ Billions 30 25 20 15 10 5 0 2005 06 07 08 09 10 11 12 13 14a 15a NOTE: Data calculated at the 2014 average exchange rate of $1.00 U.S. = $1.0996 Canadian. a Estimate. SOURCE: Chemistry Industry Association of Canada
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This year’s outlook isn’t as rosy. On the basis of a member survey, CIAC expects sales to decline 7% in 2015. Members anticipate profits will fall by 2%. “There is a bit of negativity in the report in terms of the outlook for sales, but a lot of positive things to take from it, too, in terms of profit outlook and investment outlook,” notes John Margeson, director of business and economics for CIAC. For example, even with the decline in profits, the Canadian chemical industry is still looking forward to the second-mostprofitable year in its history. Moreover, capital expenditures are set to increase by 31% to a record $3.1 billion. Nova’s investments are a big part of that number. And Dave Podruzny, CIAC vice president of business and economics, notes that more than half of the expected 7% sales decline will be due to lower prices of chemical products. “Now with the severe change in oil prices, most of what is being forecast for next year is going to be price related,” he notes.—ALEX TULLO
HOVIONE
ELECTRONIC MATERIALS: BRIGHT PROSPECTS FOR CHIPS AND DISPLAYS Buoyed by strong demand for digital displays and mass production of a new generation of microchips, makers of electronic materials anticipate a solid performance in 2015. Last year was already positive for companies, with leading players such as Dow Chemical, Shin-Etsu Chemical, and JSR enjoying strong growth. For instance, JSR posted a 32% increase in sales of semiconductor materials in the first half of the fiscal year that ends March 31. This year will also be expansionary, according to JSR President Mitsunobu Koshiba, because the chip industry will shrink circuit lines from 20 nm to 14 nm. Increasing circuitry fineness translates into higher demand for specialized materials, he says. “Demand for electronic materials for semiconductors could increase by 40%” in 2015, Koshiba says. “It’s not that the number of silicon wafers being processed will increase by that much but rather that processes are getting more complicated, which leads to more layers applied.” Demand for display materials will be strong as well but for different reasons, Koshiba says. Consumers worldwide are buying high-definition TVs, and producers of flat-panel displays are running at full capacity. “Even producers that until recently were unprofitable are now profitable,” he says. But consumer demand is fickle, he notes, and could weaken anytime.
LOOKING GOOD The fine chemicals sector enters the year with
predictions of continued growth in pharmaceutical chemicals.
FINE CHEMICALS: UP FROM ENTHUSIASM It would seem that optimism has broken away from caution in the fine chemicals sector. If last year’s outlook leaned toward enthusiasm, this year’s has a hint of ebullience. In a sector known for marked cycles, the current upswing has a sustainable quality. “A lot of people are really thinking we’ve turned the corner,” says James Bruno, president of the consulting firm Chemical & Pharmaceutical Solutions. “Production is booked through the first half of the year, and capacity seems tight. It’s a glowing, glowing report.” Although the fine chemicals sector is impacted by macroeconomic trends, it is primarily driven by the fortunes of customers in the drug industry. Sources agree that a significant uptick in drug approvals in recent years has energized sales, as has a shift in pharmaceutical company sourcing back to Europe and the U.S. as costs and quality concerns chip away at the Asian advantage. More important, a two-year round of downsizing in drug industry production capacity has increased the demand for contractmanufactured pharmaceutical chemicals and made outsourcing, heretofore an opportunistic strategy for most major drug companies, a routine means of supply. “All the trends are in our favor,” says Aslam Malik, president of Ampac Fine Chemicals. “The industry has a very healthy pipeline of Phase III drugs, which is what drives the fine chemicals business mainly.” Malik notes that Food & Drug Administration fast-track approval of new products, especially in oncology, will likely create a lot of business this year. “A lot of times, a drug goes right into Phase III before you even know about it. And it’s like, wow!” Ampac’s sales grew by more than 20% in 2014, according to Malik. “Any time you go into double digits, that’s good,” he says. “But when you go into double digits that start with a two, that’s even better.” Guy Villax, CEO of the fine chemicals maker Hovione, is similarly sanguine about prospects for 2015. “We are currently ahead of budget with a robustness we didn’t have before,” he says, noting that others in the sector are saying the same thing. “It looks as if the market is great, and I think it’s across the board. No particular segment is doing better than another.” Cambrex also expects a strong 2015, according to Chief Operating Officer Shawn P. Cavanagh. “The custom manufacturing pipeline is as healthy as it has been for quite a while,” he says. Cambrex received a huge boost from a single contract in 2012. But Cavanagh says growth these days is attributable primarily to improvement in business development, quality, and project execution. “You probably have to lump me in with the optimistic crowd,” he says.—RICK MULLIN
EYE ON MATERIALS Batteries are a bright spot in a flat materials market. $ BILLIONS Integrated circuits Chip packaging Printed circuit boards Displays Lithium-ion batteries
2013 $23.6 19.3 21.3 13.5 5.4
2014a $24.9 19.0 21.8 14.0 6.2
2015b $26.0 19.8 22.2 14.0 7.0
a Estimate. b Forecast. SOURCE: Industrial Technology Research Institute (Taiwan).
And strong demand does not always translate into higher profits for electronic materials producers, warns Yang-jer Yeh, a senior industry analyst at Taiwan’s Industrial Technology Research Institute. In the case of new materials, firms must recover R&D costs before they can book a profit. Even after they have recovered their R&D expenses, electronic materials producers don’t necessarily enjoy bumper profits because prices for their wares are constantly decreasing. Between 2001 and 2014, falling prices actually caused the market to shrink. Nonetheless, Yeh expects 2015 will be a reasonable year for the industry, especially in the second half when mass production of 14-nm chips kicks in. But companies that produce older materials will suffer from poor pricing and growing competition from China, he adds. JSR’s Koshiba agrees that competition in electronic materials is intense, often at the expense of profitability. Nonetheless, he is positive about the outlook, even beyond 2015, for companies that offer innovative materials and quickly amortize R&D expenses. The need for innovation will continue. Between 2012 and 2020, Koshiba expects, consumers will expand the amount of data they consume by a factor of 12. This jump will require a tremendous increase in data storage and processing capacity, which means more microchips, and more powerful ones.—JEAN-FRANÇOIS TREMBLAY CEN.ACS.ORG
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THERMO FISHER
COVER STORY
MIDDLE EAST: The competitive heat will rise
in 2015
The growth rate of the chemical industry in the Middle East, which represents 7% of global petrochemical capacity, is declining. Three key factors are in play, according to the consulting firm McKinsey & Co.: Global competition is strengthening, planned manufacturing capacity appears set to outstrip the availability of cheap natural gas in the region, and key markets for Middle Eastern chemicals, such as China, are making themselves self-sufficient. Growth in chemical production in the Gulf Cooperation Council region, where much of the Middle East’s chemical industry is located, is set to slip to an average rate of 7.1% per year through 2020, down from 11.0% annually in recent
RESEARCH GRADE Thermo Fisher’s immunoassay consumables
enable biomolecule mass spectroscopic analysis.
INSTRUMENTATION: GRADUAL IMPROVEMENT TO LAST ANOTHER YEAR The laboratory and analytical instrumentation business didn’t break records in 2014, but it did look brighter after a tough 2013. And 2014’s 3% growth rate should continue in 2015, according to Christi Bird, senior analyst with the research firm Frost & Sullivan. Biotech and pharma markets, along with niches such as food testing, will remain better prospects than industrial sectors. Pent-up demand has been the key driver in the U.S., particularly in academic and government markets that had to delay or forgo equipment purchases in 2013 because of government sequestration. The U.S. and Europe account for most instrument sales, and “those economies are still in recovery mode,” Bird says. One uncertainty is whether pent-up demand has run its course. Luckily for many instrument makers, consumables make up more than half their sales. This more stable segment grew at about 3.4% in 2014 and should continue to do well. “Most growth is coming from life sciences reagents and kits,” Bird says, and is being fueled by a rise in molecular biology work in applied markets as well as in traditional academic and government ones. Instrument firms are optimistic about the year ahead. Agilent Technologies predicts that its core business will grow 4% to about $4.2 billion in 2015. Its forecast is based on expectations for a gradually improving economic environment in the middle of the year and continued adoption of technologies with better performance. U.S., Chinese, and Indian markets should get stronger, while markets in Western Europe, Brazil, and Japan will stay somewhat weak, according to Mike McMullen, Agilent’s chief executive officer-elect. After splitting off its electronics measurement business in late 2014, Agilent reorganized around life sciences and applied markets, diagnostics and genomics, and services and consumables. Likewise, PerkinElmer focuses on the environmental, diagnostics, and life sciences sectors. “We have nice growth prospects across the board,” CEO Robert F. Friel told investors in late 2014. “Macro indicators would imply that the diagnostics business continues to do quite well.” Indeed, the rapidly growing diagnostics business has become a target for many instrument makers. At Illumina, sales of next-generation sequencing (NGS) systems and related consumables were up 30% in 2014. “We are well positioned for continued long-term growth as we develop and address the large and untapped market opportunities ahead,” CEO Jay Flatley says. Likewise, Thermo Fisher Scientific moved further into diagnostics with recent U.S. and European clearances for clinical use of its NGS systems. Integrating the Life Technologies acquisition and improving cash flow in 2014 have helped position the company for a strong 2015, according to CEO Marc Casper.—ANN THAYER CEN.ACS.ORG
Meanwhile, after years of enjoying a natural gas surplus, the region may experience a gas shortage that could be felt anytime from 2015 onward, McKinsey warns. Measures that Middle East chemical firms could take to offset the shortage include the adoption of mixed-feed crackers, methanol-to-olefins technology, and crude-to-chemicals processes, the consulting firm states. Companies are also responding by diversifying from commodity chemicals into specialty chemicals, according to Aparajith Balan, a Middle East program manager at Frost & Sullivan, a market research firm. But a diversification strategy is not without its
DOMESTIC DEVELOPMENT Local sales will grow fastest for Middle Eastern chemical makers. ■ 2013 ■ 2025a
Annual growth rate
$ Billions
Regional sales Exports
50 120 50 80
7% 4%
a 2025 figures are high end of a range. SOURCE: GPCA data, McKinsey & Co. analysis
decades, says the Gulf Petrochemicals & Chemicals Association (GPCA), the region’s leading industry association. GPCA predicts that the emergence of low-cost hydrocarbons in the U.S. will be one of its major competitive threats. “North American chemicals will double in the next decade, giving them capabilities to be in markets that we thought were traditionally ours,” said Khalid A. Al-Falih, chief executive of Saudi Aramco, at the GPCA Annual Forum in Dubai last November.
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pitfalls, Balan warns. “While the Middle East has access to most of the essential industrial resources like raw materials, utilities, and human resources, it falls short of the advanced technologies that are required to make manufacturing possible,” he says. Local companies are attempting to address this problem by stepping up R&D activity. Saudi Basic Industries Corp., for example, says it more than tripled the rate at which it applied for patents in 2014 compared with 2010.— ALEX SCOTT
ISTOCK
TAKING CARE
Demand for antiaging cosmetic ingredients will grow as the population ages in developed countries.
SPECIALTIES: ECONOMYBEATING GROWTH AHEAD Specialty chemicals will grow a bit faster than the overall economy this year with bright spots including cosmetic ingredients and catalysts for plastics. However, specialty chemicals used for extracting oil and gas may suffer in the face of the current energy glut. In a 2015 outlook report, economists at the American Chemistry Council project that U.S. production of specialties will benefit from strong markets including automobiles, appliances, and passenger jets. They expect U.S. specialty chemical output to increase 4.6% in 2015 compared with the year earlier, following a 3.8% increase in 2014. Global demand for specialties will be strong too, although not as strong as in the U.S. ACC projects world specialty chemical production will increase 4.2% after growing 3.6% in 2014. The group figures that both the U.S. and world economies will expand by 3.0% in 2015. Growth trends are favorable for polyolefins, notes Al Beninati, president of Grace Catalysts Technologies. Thanks to population growth and increased consumption in emerging economies, demand for polypropylene and polyethylene will expand at an average rate of 5% per year. Demand for polyolefin catalysts should rise accordingly, he says. The recent drop in crude oil prices should have no significant effect on sales of catalysts to oil refineries, at least in the short term, Beninati says. In fact, he points out, lower oil prices portend
healthy demand for fuels and the catalysts needed to refine them. But demand for thickening agents and drilling sands used in the hydraulic fracturing process for extracting oil and gas may suffer as oil prices drop, notes Ray K. Will, a director at market research firm IHS Chemical. U.S. oil companies will likely delay new projects as long as oil prices are low, he says. On the other end of the specialty chemical spectrum, makers of antiaging cosmetic ingredients will continue to see growing demand for their elixirs, says Nikola Matic, industry manager at the consulting firm Kline & Co. He predicts antiaging ingredient demand will grow 5% in 2015, faster than growth for cosmetic ingredients overall, which he expects will be between 3% and 5% in mature markets such as the U.S. and Europe. Consumers, Matic predicts, will be increasingly critical of cosmetics that boast about natural ingredients when they in fact contain mostly synthetics. Expect consumers to pay more attention to product labels this year, he says.—MARC REISCH
LATIN AMERICA: Reform may lead to chemical industry growth in the region This year, the first new North American oil and gas recovery in 2013. Already, shale region, and the company doesn’t have to ethylene cracker to be built in more than a accounts for 10% of its gas production. pay high tariffs if it exports polymers to decade is set to open on the Gulf Coast … Dow Chemical, which cracks ethane at neighboring Brazil. of Mexico. its complex in Bahia Blanca, Argentina, has However, price controls in Argentina Etileno XXI, a $4.5 billion ethylenemuch to gain if shale gas takes off there divert natural gas away from industrial use polyethylene joint venture between Brazil’s as it has in the U.S. Dow is “making a lot of and toward home heating in winter months, Braskem and Mexico’s Grupo Idesa, could money,” says Jorge Bühler-Vidal, president sometimes leaving Dow without adequate be a sign of things to come for the Mexiof North Brunswick, N.J.-based Polyolefins supplies. More gas availability could enable can chemical industry. Private initiative is Consulting. The ethane is cheaper than Dow to run flat out and eventually expand, beginning to make up for decades of unthe naphtha feedstock used in most of the Bühler says. derinvestment during which Mexico’s Overall, Latin America’s major state oil company, Pemex, held a economies are expected to perform UPLIFT Latin America will get some monopoly in basic chemicals. better in 2015 than they did in 2014, economic relief in 2014. New laws are liberating the rest of but they likely won’t shake off their the hydrocarbon sector as well. Last slump of the past couple of years. The Argentina year, Mexican President Enrique Peña International Monetary Fund (IMF) exNieto signed an energy reform packpects Brazil to grow by 1.4% in 2015, Brazil age into law that loosens Pemex’s versus 0.3% in 2014. Argentina’s ■ 2013 grip on the country’s oil and gas. economy will shrink 1.5% in 2015, vera Chile ■ 2014a Private energy investment may free sus a 1.7% contraction in 2014. ■ 2015 up more feedstocks for potential pet“A modest recovery is projected Mexico rochemical projects. for 2015, yet risks remain tilted to Argentina is also trying to unlock its the downside as many economies Venezuela hydrocarbon potential. According to struggle to find new engines of sus–4 –3 –2 –1 0 1 2 3 4 5 the state oil company YPF, Argentina tainable growth in an environment Change in GDP from the previous year, % is second only to the U.S. in global of stagnant commodity prices and a Estimates. GDP = gross domestic product. shale gas reserves. The company more binding supply bottlenecks,” SOURCE: International Monetary Fund invested $1.1 billion in unconventional IMF says.—ALEX TULLO
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