COVE R STO RY NO SHELTER
SH U T T ERSTOC K
The U.S. housing market crash likely kindled the current global economic crisis.
WORLD CHEMICAL OUTLOOK TASKED WITH EXPLAINING the latest economic indicators, economists sound much like Alexander, the boy in a popular children’s book who says, “I could tell it was going to be a terrible, horrible, no good, very bad day.” For the global chemical industry, the very bad day started early in the fourth quarter of 2008, and it may last another six months. The recession that started in the U.S. in late 2007 has touched off an avalanche of increasingly dire projections. Chemical chief executive officers are even gloomier about the future than their counterparts in other industries, according to an international survey by the advisory firm PricewaterhouseCoopers. Only 39% are very confident of achieving growth in 2009, compared with half of CEOs across all sectors. The consensus of prognosticators is that the global economy will continue to contract in the first half of 2009 and improve sometime after that. Technically, a recession is considered “over” when the gross domestic product stops shrinking. Economists say the recovery, when it comes, will be slow. Still, a review of last year’s conjectures shows just how far off forecasters can be,
in large part because it is almost impossible to predict abrupt change. Economists wrongly predicted that most economies would grow in 2008. They did not anticipate $140-per-barrel oil. Also missing from their calculations was the March collapse of Bear Stearns, which roiled financial markets, and September’s Hurricanes Gustav and Ike, which shut down U.S. petrochemical production for weeks. C&EN’s 2009 forecasts for the U.S., Canada, Latin America, Europe, and Asia-Pacific tell a common story of how economic woes are affecting the chemical industry. Customers, worried about future demand, are delaying purchases and drawing down their inventories. In response, chemical manufacturers are cutting back production, shutting or idling plants, and in many cases, laying off workers. Emerging markets took up the slack of flat U.S. and European demand in 2008. But economies in Asia and Latin America that recently experienced huge growth rates will expand more slowly this year. Volatile energy prices and the strengthening U.S. dollar create new winners and losers. U.S. manufacturers will lose the
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favorable currency effect they enjoyed in 2008, while a weaker euro will benefit European companies. If the cost of natural gas versus oil decreases, competitive advantage for basic chemicals will further shift from Europe and Asia to the Middle East. World Chemical Outlook was compiled by Senior Editor Alexander H. Tullo in New Jersey; Senior Editor Melody Voith in Washington, D.C.; and Senior Correspondents Patricia L. Short in London and JeanFrançois Tremblay in Hong Kong.
CONTENTS UNITED STATES CANADA LATIN AMERICA EUROPE ASIA-PACIFIC
12 15 18 20 23
MORE ONLINE Stay current on the chemical industry’s responses to changing economic conditions by visiting www.cen-online.org/economy.
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UNITED STATES
one of the worst recessions in the post-war period,” asserts Ethan S. Harris, an economist at Barclays Capital. To counteract the downward momentum, Harris expects a “full-court press from policymakers” including rate cuts by the Federal Reserve, regulatory action to pry open capital markets, and a $600 billion or larger stimulus package. Adding to the cloudy conditions inside the chemical industry’s crystal ball is the unpredictability of energy costs. In December, the price of a barrel of oil fell to less than $40, compared with a high of $147 in July. Volatile costs create havoc in the ability of chemical firms to set prices. Overall, however, fuel should cost less this year. The U.S. Energy Information Administration projects prices will average about $60 per bbl. Early in 2008, the possibility of $60per-bbl oil would have been happy news to chemical industry executives. They started the year railing against the high cost of energy and raw materials as they struggled to maintain profit margins. Even then, however, the months-long decline in hous-
Chemical industry mirrors larger economy, where a rebound will require HOME VALUES to stabilize MELODY VOITH, C&EN WASHINGTON
THE U.S. ECONOMY is beginning 2009 in the teeth of a recession that started way back at the end of 2007. Within the chemical industry, companies as diverse as industrial gas maker Praxair and fertilizer producer Mosaic have warned of weak earnings in the fourth quarter of 2008 through the first quarter of this year. Executives are wary of making predictions much beyond that. One reason is that they and their customers are ridding themselves of excess inventories and aren’t sure how things will look after the destocking period. In its end of the year forecast, the American Chemistry Council (ACC), the U.S. chemical industry’s main trade organization, predicts that demand for U.S. chemicals will continue to weaken in 2009. ACC estimates that chemical output, excluding pharmaceuticals, will shrink by 3.6% in 2009. Pharmaceutical chemical production will increase by 1.9%, a slight improvement from 2008, when it edged up only 1.1%. Although the output decline is enough to worry chemical executives, it is slightly less steep than during the 2001 recession, when output of chemicals excluding pharmaceuticals dropped by 6.9%. Chemical firms have already begun to cut back on production because of softening consumer demand for housing, durable goods such as cars and appliances, and consumer goods including electronics. In
2009, ACC projects plant idlings and shutdowns will bring operating rates down to 75.0% from a recent high of 79.2% in 2007. Slowing production means companies will continue to cut payrolls. Overall, there will be a 3% drop in chemical employment this year, according to ACC. Economists agree that a turnaround in demand for chemicals will hinge on factors outside of industry’s control: home prices, consumer confidence, and a possible federal stimulus package. Given the outlook for the overall economy, however, ACC’s projections seem optimistic. “The deterioration in the capital markets has turned a ‘slow motion’ recession into
PRICES
Agricultural chemicals and basic inorganics saw significant increases PRODUCER PRICE INDEX, 1982 = 100
All commodities Chemicals Basic chemicals Basic inorganics Basic organics Paints Pharmaceuticals Fats & oils, inedible Agricultural chemicals Plastic resins Other chemicals
2005
2006
2007
2008a
CHANGE 2007–08
157.4 192.0 188.5 139.7 200.3 190.7 298.3 146.9 152.8 193.5 150.9
164.7 205.8 212.4 173.8 222.8 203.6 312.1 147.9 158.4 198.4 158.1
172.6 214.8 226.4 186.0 236.0 212.8 323.2 189.4 181.3 195.9 161.7
182.8 238.2 261.8 238.9 267.4 223.4 339.2 214.1 249.4 214.1 171.2
10.0% 10.9 15.6 28.4 13.3 5.0 5.0 13.0 37.6 9.3 5.9
a C&EN estimates. SOURCE: Bureau of Labor Statistics
TRADE
Despite strong exports, trade deficit widened $ MILLIONS
Organic chemicals Inorganic chemicals Plastics Fertilizers Pharmaceuticals Cosmetics Dyes & colorants Other TOTAL
2005
$26,765 7,698 28,861 2,990 25,012 8,059 4,901 15,846 $120,132
EXPORTS 2006 2007
2008a
2005
TRADE BALANCE 2006 2007
2008a
$48,083 20,964 19,463 8,755 60,604 9,621 3,171 12,981
-$11,244 -2,467 11,476 -711 -14,164 137 1,930 6,907
-$12,373 -$8,309 -2,340 -2,548 13,804 18,881 -497 -1,642 -17,315 -21,043 767 1,248 2,283 2,593 8,383 9,879
-$11,577 -7,982 22,890 -699 -24,211 2,126 3,189 13,190
$135,199 $154,457 $180,568 $128,268 $142,487 $155,392 $183,642
-$8,136
$29,839 9,074 32,617 2,941 28,431 9,100 5,337 17,860
$33,869 10,807 37,129 3,339 32,755 10,120 5,708 20,730
2008a
$36,506 12,982 42,353 8,056 36,393 11,747 6,360 26,171
IMPORTS 2006 2007
2005
$38,009 10,165 17,385 3,701 39,176 7,922 2,971 8,939
$42,212 11,414 18,813 3,438 45,746 8,333 3,054 9,477
$42,178 13,349 18,248 4,981 53,798 8,872 3,115 10,851
a C&EN estimates. SOURCE: U.S. Census Bureau
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-$7,288
-$941
-$3,074
DEMAND Both shipments and inventories increased slightly $ Billions 70
$ Billions 70
Shipments
Chemicals
60
60 Chemicals
50 40 30
Inventories-to-shipments ratio
Inventories
Chemicals excluding drugs 2007
1.1
40
1.0
Chemicals excluding drugs J F M A M J J A S O N D J F MA M J J A S O
2008
2007
Chemicals
1.2
50
30
J F MA M J J A S ON D J F MA M J J A S O
1.3
Chemicals excluding drugs
0.9 J F MA M J J A S O N D J F MA M J J A S O
2008
2007
2008
SOURCE: Department of Commerce
EFFICIENCY Productivity gains were interrupted in 2008 Productivity index, 2002 = 100 140 120
Output per hour
Unit labor cost index, 2002 = 100 120
100
100
80
90
60
80
1998 99 00 01 02 03 04 05 06 07 08a
Unit labor costs
110
1998 99 00 01 02 03 04 05 06 07 08a
a C&EN estimates. SOURCES: Bureau of Labor Statistics, Federal Reserve Board
ing values signaled that a new economic enemy was on the horizon. In March, the subprime mortgage fiasco and resulting credit crisis nearly took down the U.S. financial industry. Chemical companies looked comparatively stable thanks to their strong balance sheets, although firms that supplied the U.S. housing and auto markets experienced sales declines. During the first quarter of 2008, the chemical industry countered soft U.S. demand by selling in emerging markets. For example, DuPont had earnings growth of 19.5% compared with the year before, with 62% of its sales coming from outside the U.S. Companies that produced chemicals in the U.S. to sell overseas also benefited from the weak dollar. The currency exchange benefit, as high as 7% for some firms, went straight to the bottom line. For most companies, earnings increased because strong international demand allowed them to raise prices. Overall, the producer price index for chemicals shot up 10.9% in 2008, almost three times the increase in 2007. During the second and third quarters, however, the credit crisis that began with sinking U.S. home values infected the global financial system. In Europe, which is still a large market for U.S. chemical makers, Germany and the U.K. entered recessions.
Third-quarter chemical earnings were mixed because of the strength in the market for agricultural goods. But C&EN’s earnings index for 24 companies showed a grim 8.7% drop when the results from fertilizer makers Terra Industries and Mosaic were removed. Although companies won’t report fourthquarter results for a few weeks, expectations aren’t high. “Trade had previously been the bright spot. Exports had been up by 10 to 12% early in the year but slowed in the summer and hit a wall in September,” says T. Kevin Swift, chief economist at ACC. Anticipating that the drop in demand would continue, chemical companies announced plant shutdowns and other costcutting moves late in the fourth quarter. For instance, Dow and DuPont announced
restructurings and layoffs, as well as cutbacks in capital spending. Industrial gas makers Praxair and Air Products & Chemicals announced layoffs and operational slowdowns despite having posted earnings gains earlier in the year. Even in the strong agricultural market, with grain inventories at historically low levels, fertilizer makers are cutting back production while farmers wait for prices to come down. “Like every other industry, agriculture has felt the impact of the global financial downturn,” wrote PotashCorp Chief Executive Officer Bill Doyle in a December earnings warning. But he went on to promise better times in the new year. “Given the essential nature of our products … we anticipate strong demand will return as 2009 progresses,” he wrote. During 2008, production fell in agriculture and most other chemical sectors. Government data show that U.S. output of the fertilizer feedstock ammonia slowed. Overall, agricultural chemical volume decreased about 3%. The biggest U.S. production drop in 2008 was in basic organics, which decreased 13.4% from 2007 after three years of slow but steady increases. A significant portion of the difference in ethylene and propylene production was due to hurricane-related shutdowns on the U.S. Gulf Coast in the third quarter. In 2008, overall chemical plant operating
CHEMICAL PRODUCTION
Hurricanes and economic slowdown brought output declines THOUSANDS OF METRIC TONS
Ammonia Chlorine Ethylene Propylene Sulfuric acid
2004
2005
2006
10,939 12,329 25,682 15,345 38,043
10,143 10,278 23,974 15,490 37,192
9,962 10,333 25,020 15,650 35,905
2008a
2007
10,386 10,791 25,412 16,165 36,057
9,669 9,831 23,287 14,918 35,418
a C&EN estimates. SOURCES: U.S. Census Bureau, National Petroleum Refiners Association
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CHANGE 2007–2008
-6.9% -8.9 -8.4 -7.7 -1.8
MARKET CONDITIONS
In 2009, prices will increase but production will not Industrial production index, 2002 = 100
Producer price index, 1982 = 100 300
120 Production 110
Prices
250 Basic chemicals
100
200
All chemicals
All chemicals
150
90
Basic chemicals
100
1999 00 01 02 03 04 05 06 07 08a 09a
1999 00 01 02 03 04 05 06 07 08a 09a
a C&EN estimates. SOURCES: Bureau of Labor Statistics, Federal Reserve Board
OUTPUT
Manufacturing decreased in 2008; basic organics dropped sharply PRODUCTION INDEX, 2002 = 100
Manufacturing Chemicals Basic chemicals Basic inorganics Basic organics Resins, synthetic rubber & fibers Agricultural chemicals Pharmaceuticals & medicines Paints, coatings & adhesives Soaps, cleaning compounds & toilet preparations
2005
2006
2007
2008a
CHANGE 2007–08
108.6 109.3 114.4 103.5 121.6 109.1
114.0 112.6 115.6 99.9 125.3 107.8
115.3 114.2 119.4 102.8 129.6 108.8
111.8 110.6 109.0 106.5 112.3 98.6
-3.0% -3.2 -8.7 3.6 -13.4 -9.4
114.4 105.1 103.7 115.8
121.7 114.9 98.8 121.5
112.7 118.7 99.0 116.8
108.9 119.9 97.6 118.8
-3.3 1.0 -1.3 1.7
a C&EN estimates. SOURCE: Federal Reserve Board
rates slipped 2.4% to an average of 76.8%. And December’s announcements of U.S. plant shutdowns foreshadow a difficult year for workers in the chemical industry. On Dec. 8, 2008, Dow announced it would eliminate 5,000 positions, or 11% of its workforce. Earlier that week, Chief Financial Officer Geoffery E. Merszei outlined the challenges facing Dow in a presentation at the Citi Chemicals Conference for investors. His observations for Dow, the largest U.S. chemical company, point to trends affecting the industry as a whole. Demand dropped in late October, Merszei said, tracing the weakness to the broader economic slowdown. The credit crisis has prompted Dow’s customers to begin to work from their current inventory. And with raw material prices dropping, purchasing managers are delaying orders in hopes of getting a better deal in the future. “We’re seeing volumes drop significantly,” Merszei said. The impact of lower sales volumes could be long lasting, according to Merszei. “We’re operating at our low-
est capacity in over seven years, which means our fixed costs are increasing,” he said. And it will take 60 to 180 days for lower fuel and raw material costs to work through Dow’s inventory, he added. In the meantime, the downward pressure on prices has combined with lower volumes, resulting in a greater than 20% drop in sales revenue. POSITIVE SIGNS for economic growth
this year are difficult to find. According to a survey by the Institute for Supply Management, purchasing and supply executives for manufacturing firms “lack their usual optimism about their organizations’ prospects, as they consider the first half of 2009; however, they are somewhat more positive about the second half,” thanks to anticipated lower raw material prices. Economists agree that business indicators will begin to improve only when housing values stabilize and consumer spending rebounds. But they differ on when that will be. “The sectors that went into recession first are also likely to be the first to recover. Thus, two of the most cyclical sectors—
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autos and home construction—are likely near their bottoms for this cycle,” Barclays’ Harris says. Members of the National Association of Home Builders (NAHB) are not so optimistic. “We have seen no improvement over the past month in terms of sales conditions for new homes,” said NAHB Chief Economist David A. Crowe in mid-December. “In fact, certain factors have gotten progressively worse, not the least of which is the job market, where massive layoffs are having a devastating effect on consumer confidence.” A December survey of NAHB members about home sale expectations for the next six months fell two points to an all-time low reading of 16—on a scale where a score of 50 marks the boundary between “good” and “poor.” And consumer spending has a long way to go to get back into positive territory. According to the Department of Commerce, the nation’s economy contracted 0.5% in the third quarter of 2008 as measured by gross domestic product. Consumer spending decreased 3.8% in the same period, and spending on durable goods fell 14.8%. For carmakers, the impact of restricted credit and declining consumer confidence has been dramatic. In November, North American auto sales fell to their lowest level, on a seasonally adjusted basis, in at least two decades, according to a report by consultants J. D. Power & Associates. Sales plunged from an annualized rate of just over 16 million per year at the end of 2007 to only 10.2 million in November, an unprecedented decline. Also in November, the National Association for Business Economics (NABE) released a consensus of forecasts by 50 leading economists. The panel trimmed its expectations for gross domestic product growth in 2009 to just 0.7%, down from 2.2%, based heavily on a dimmer outlook for consumer spending. On a more positive note, more than 60% of the forecasters expect that the depth of the recession should be relatively contained, with a peak-to-trough decline in productivity of less than 1.5%. Nearly three-fourths of NABE respondents think the recession could persist beyond the first quarter of 2009. And when the recovery comes, Barclays’ Harris predicts, it will likely be slow and highly dependent on continued government action. “If the recovery is as weak as we believe,” he says, “the Fed will keep its foot planted on the accelerator to ensure there is enough growth to eliminate economic slack.” ■
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CANADA
TRADE
With an UNHAPPY ENDING TO 2008, Canadian producers aren’t eager about beginning 2009 ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU
Canada’s chemical trade deficit grew for the first time since 2003 $ Billions (U.S.)
40
30
FOR THE CANADIAN chemical industry, 2008 was a bit like the cartoon character that rides a raft down a quiet river and realizes too late that it is heading for the falls. The first nine months of the year were calm, but the final three were terrible enough to put a damper on the entire year. With such a finish to 2008, Canadian chemical industry watchers don’t expect 2009 to begin particularly well. Largely because they took the last three months of 2008 to be the beginning of a downturn in industry performance, Canadian chemical producers expect 2009 to start off dismally. They forecast steep drops in sales and profits for the year. A
spike in oil prices to as high as $147 per barrel in July, average chemical prices were up nearly 10% for the year. Production volumes for a few basic chemicals such as chlorine, ethylene, and propylene were down. This is hardly surprising given the decline during 2008 of the North American housing and auto industries, major consumers of derivatives of these chemicals, such as polyvinyl chloride and polypropylene. Moreover, Pétromont, an ethylene cracker joint venture between Dow Chemical and the Quebec provincial government arm Société Générale de Financement du Quebec, closed at the end of April, hitting Canadian ethylene output. LyondellBasell SHIPMENTS shuttered two polyproShipments of most products increased strongly in 2008 pylene plants—one in Quebec and another in $ Billions (U.S.) Ontario—during the 50 Chemical manufacturing year as well. 40 Projections from the Canadian Chemical 30 Producers’ Association Resin, synthetic 20 paint a more middling rubber & fibers Basic chemicals evaluation of chemical 10 industry performance Fertilizers 0 in 2008. According to 1998 99 00 01 02 03 04 05 06 07 08a CCPA, chemical sales increased 2% in 2008, NOTE: All data were converted at the exchange rate of $1.00 U.S. = $1.0516 Canadian. a C&EN estimates. SOURCE: Statistics Canada to $24 billion, for the basic chemicals and resins that the organization tracks. In conpossible bright spot, however, may come stant 1997 Canadian dollars, a proxy for in the form of a weaker Canadian dollar, volumes because it eliminates the effects of which makes the industry in Canada more pricing on sales data, sales declined by 7%. competitive. Canadian producers also CCPA’s outlook for 2009, based on a hope for a turnaround in performance by membership survey, is bleak. Canadian the end of the year. chemical producers expect sales to plummet C&EN projections show that 2008 wasn’t by 27%, or 13% in 1997 dollars. “We are lookso bad. Canadian chemical shipments were ing at a recession period that may not see a fairly strong, increasing by some 6% to $49.6 recovery until the third quarter,” says David billion. Sales of basic chemicals and fertilPodruzny, the trade association’s vice presiizer were up. One negative, however, was a dent of business and economics. 2% decline in sales of resins, synthetic rubber, and fibers, largely owing to lackluster results in October, the most recent month for which Statistics Canada reported data. The higher sales figures were primarily the result of increased prices. Buoyed by a
Imports Exports
20 10 1998
00
02
04
06
NOTE: All data were converted at the exchange rate of $1.00 U.S. = $1.0516 Canadian. a C&EN estimates. SOURCES: Statistics Canada, Industry Canada
According to Podruzny, even if the economy recovers at that time, the recession will be one of the longest and most severe on record. He blames its duration and depth on high oil prices as much as on the burst of the housing bubble. “A very rapid run-up in energy prices is probably one of the key underlying players in why this particular downturn has been so severe,” he says. “You can’t have advanced economies see large net increases in energy and expect them to continue to grow.” Profits for Canadian chemical makers have soured. In 2007, they saw their highest profits since 2000. In contrast, CCPA projects that profits in 2008 will have declined by 19%. Podruzny says profitability took a hit after the third quarter as prices and demand dropped precipitously. Back at the beginning of 2008, Canadian chemical makers expected profits to decrease by 10%. Podruzny says profits increased strongly for the first three quarters of the year. In fact, he says he wouldn’t have foreseen, even in September, profits declining enough in the last quarter to bring the average below that negative 10% mark. Profits are shaping up to be so dismal in the last three months of the year that the entire year will see a substantial decrease, Podruzny says. Chemical makers, he says, are struggling just to tread water. “It is a far cry from even three months ago,” he says. Canadian chemical producers believe they are in for a greater decline in 2009: a 35% decrease to about $1 billion in profits
Chemical makers in Canada are struggling just to tread water.
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08a
COVE R STO RY
October and NovemPRICES ber. The decline in oil Chemical prices rose sharply in 2008 prices, he notes, has also cut into the AlPrice index, 2002 = 100 berta Advantage. 160 The last three Inorganic chemicals months of 2008 140 weren’t entirely bad, 120 however, Thomson Organic chemicals says. “We are actually 100 seeing good demand All manufacturing in December,” he ob80 Chemicals & chemical products serves. “It may be that 60 customers have run 1998 99 00 01 02 03 04 05 06 07 08a their inventories down a C&EN estimates. SOURCE: Statistics Canada to zero and are in the position that they have to come into the market again.” 2 million metric tons of annual potash proNevertheless, Thomson doesn’t expect duction this year because of lower demand. 2009 to be particularly strong. “It wouldn’t “Farmers, like any other consumer, are feelsurprise me if the first and second quarters ing the impact of the global financial crisis,” were difficult,” he says. “I am hopeful that the company said in a statement. we will start to see some general economic Even so, the industry has a few bright recovery in the second half of 2009.” spots, including Canexus, a major producer Thomson notes that Nova hasn’t been as of sodium chlorate, a precursor to the pessimistic as other industry players about paper-bleaching chemical chlorine dioxide. the buildup of petrochemical capacity in The company has a positive outlook bethe Middle East, a concern that predates cause of the decline in the Canadian dollar the financial crisis. Nova executives have from unusually high levels—at par with the expected big plant start-ups to be spread U.S. dollar in the middle of 2008—to hisout instead of starting all at once and inuntoric norms of about 80 cents on the U.S. dating the market. “We had a very positive dollar by year’s end. outlook in terms of where we were going in Gary L. Kubera, Canexus’ chief executive 2009 and 2010,” he says. “An outlook that officer, explains that his company’s costs we would see as positive is being strained are in Canadian dollars but that some 70% by economic issues.” of his sales are exports from Canada paid in U.S. dollars. “We had been fighting an appreciating Canadian dollar for the last three THE SUDDEN DOWNTURN also put a years,” he says. “And the rapid and signifidamper on the strong year Canadian fertilcant revaluation of late gives us quite a sigizer makers were having. Agrium idled pronificant cushion to deal with uncertainty.” duction at its Fort Saskatchewan, Alberta, Kubera expects sales volumes to decline. plant because of declining demand owing to Paper markets such as toilet paper and high inventories, tight credit, a late North paper towels aren’t sensitive to economic American harvest, and lower crop and nudownturns, but packaging and writing trient prices. PotashCorp is curtailing some paper are. He also expects sodium chlorate prices to fall. But he anticipates that these CURRENCY COMPARISON lower volumes and prices will be offset by The U.S. dollar weakened severely but recovered by the end of 2008 the cheaper dollar, leaving more money in Canexus’ coffers. Relative value of the U.S. dollar versus the Canadian dollar, January 2005 = 1.00 Nova’s Thomson says his company will 1.1 also benefit from the currency situation. 1.0 He notes that an 80-cent Canadian dollar means about $100 million more income to 0.9 his company than when the two currencies 0.8 are at par. For Canadian chemical makers, the cur0.7 rency situation should provide some com2005 2006 2007 2008 fort in a year that, at the very least, is showSOURCE: U.S. Federal Reserve ing every sign it will begin dismally. ■
industry-wide. That would be the worst the Canadian industry has seen since 2003, the last trough of the chemical business cycle. Earnings of individual chemical companies through the first nine months of 2008 reveal few clues of the coming downturn. Imperial Oil, the Canadian affiliate of ExxonMobil, reported a 58% increase in profits for the third quarter, to $36 million, on $374 million in sales. For the first three quarters, the company reported a 3% decline in profits on a 15% increase in sales. Earnings at Nova Chemicals’ ethylene and polyethylene business, which operates plants solely in Canada, also remained strong through the first nine months. Sales in the segment increased 39% versus the same period in 2007, hitting $4.5 billion. Meanwhile, operating income climbed 18% to $627 million. Production of polyethylene was up about 9% during the period while selling prices increased 38%. But Grant Thomson, president of olefins and feedstocks at Nova, says business went downhill after the third quarter. “It was almost like two years in one,” he says. “The first year was the first nine months up through September, and the second year started on Oct. 1.” Because of high oil prices worldwide relative to natural gas prices in Canada, plants in Alberta, which use natural gas-derived feedstocks, were enjoying record profits. The “Alberta Advantage”—the difference in the cost of making ethylene in Alberta versus the U.S. Gulf Coast—hit 28 cents per lb in the third quarter, when ethylene was selling for roughly 70 cents per lb. “We were running absolutely as hard as we could,” Thomson says. But soon after, “a significant downturn in demand and prices happened,” Thomson recalls, “as people realized that we were into this economic crisis.” Ethylene prices tumbled by 40% over the months of
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LATIN AMERICA The region may avoid the worst of the petrochemical downturn, but GROWTH WILL SLOW ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU
pek’s polyethylene terephthalate (PET) and terephthalic acid unit, up 8%, and its polypropylene and polystyrene business, up 4%. The stormy economic weather began to impact Alpek in the third quarter, when its PET business saw a 3% tumble in volumes. In an October conference call with stock analysts, Alfa Chief Financial Officer Alejandro M. Elizondo said PET customers saw the sharp drop in oil prices and avoided buying resin because of their expectation that PET prices would fall in kind. He anticipates that demand for the resins—used in the recession-resistant beverage sector— will come back. Distance makes Brazil a bit more insu-
worse. And in South America, new projects THANKS TO HIGH commodity prices and and expansions will be more likely to slip. economic policies that have hemmed in Financial results from the first three chronic regional problems like inflation, quarters of 2008 reveal a chemical industry Latin American countries have enjoyed an in Latin America that is still expanding. But unprecedented stretch of strong economic they also show the beginnings of regional growth. Economists expect growth to slow impact from the global ecowith the global economic downturn, but nomic crisis. not enough to push the region into recesGROSS DOMESTIC PRODUCT The state oil company of sion as has happened in more developed Latin American growth is expected to fall, but from Mexico, Pemex, which has areas. very high levels a monopoly on basic petroThat expectation is borne out in forechemical production in that casts for economic expansion this year. Argentina country, saw a modest net The International Monetary Fund expects chemical production rise of 3.1% growth in South America and Mexico Brazil 1.7% in the first three quarin 2009. That’s a decline from the 4.6% Chile ■ 2009a ters. Ethylene production growth in 2008 but still a decent amount ■ 2008a Colombia increased a healthy 5.8%. But of expansion. IMF economists say the re■ 2007 ■ 2006 output of some other products gion is suffering from a commodity export Mexico decreased. For example, vinyl slowdown and an increasingly difficult enPeru chloride, used to make the vironment in which to borrow from foreign housing-intensive product lenders. Venezuela polyvinyl chloride, decreased IMF forecasts growth of 3.0% and 3.6% 0 5 10 15 29.6% over the period. in Brazil and Argentina, respectively, down % change in gross domestic product from the previous year Alpek, the chemical subsidfrom 5.2% and 6.5% in 2008. For Mexico, iary of Mexican conglomerate the Latin American nation most coma Estimates. SOURCE: International Monetary Fund Grupo Alfa, saw revenues mercially connected to the U.S., the fund increase by 28% to $3.8 bilpredicts a less robust 0.9% rise in output, a lated from the U.S. downturn, although lion and operating income climb 8% to $154 slight decrease from last year. companies there are bracing for a slowmillion for the first nine months of the year Venezuela is suffering from its heavy dedown from high levels of growth. versus the same period in 2007. But those inpendence on petroleum exports. Oil prices The country’s largest petrochemicreases were driven mostly by a 19.5% rise in have fallen to less than one-third of the cal maker, Braskem, saw a 1% decline in selling prices versus the year-ago period berecord rates seen in July. Still, IMF predicts revenues during the first nine months of cause of the second-quarter spike in oil costs. 2.0% growth for Venezuela in 2009, but 2008 to $9.6 billion. Braskem’s resins busiProduction volumes thus increased more that’s sharply down from 6.0% in 2008. ness saw a 9% increase in volumes for the modestly in major businesses such as AlBut if the global downturn gets worse, first three quarters. IMF cautions, so will Polyethylene and exports and financial CURRENCY COMPARISON polypropylene volconditions in Latin The dollar rallied against Latin American currencies late in 2008 umes increased 4% America. “Such a sceand 11% for the period, nario will slow growth Relative value of the U.S. dollar versus Brazilian and Mexican currencies, January 2005 = 1.00 respectively. Braskem in the region even 1.2 showed some weakmore,” the fund said in 1.0 ness in the third quara recent report. For the 0.8 ter with polyethylene two biggest economies volumes decreasing in the region, those ■ Brazilian real 0.6 15% and polypropylene of Mexico and Brazil, ■ Mexican peso dropping 5%. this means that chemi0.4 2005 2006 2007 2008 Bernardo Gradin, cal companies, which Braskem’s new chief have held up well SOURCE: U.S. Federal Reserve executive officer, so far, will do much WWW.CEN-ONLI NE.ORG
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told analysts in November that he expects Brazilian demand for polymers to increase between 5% and 6% in 2009. “We think that the domestic demand in Brazil will still be positive in terms of growth next year, of course growing less than this year,” he said. Even without the economic downturn, excess capacity coming onstream in the Middle East and Asia would have spelled trouble for the chemical industry in coming years. But compounding that cyclical trough with a severe economic downturn will make matters worse, says Robert J. Bauman, president of the Spring, Texasbased consultancy Polymer Consulting International. “I believe the downturn will be the longest and deepest in the history of the petrochemical industry,” he says. The trough could last through 2015, Bauman says. But compared with North America, which depends on the export market for 10 to 15% of its sales, and Europe, which will be a natural home to materials made in the Middle East, Latin America should be in relatively good shape. However, he adds, “while domestic demand in Latin America may not decline as much as in the developed countries, the additional decline in resin and product exports will result in much lower operating rates and the need to idle capacity.” THE DOWNTURN is starting to hit Latin America already. Last month, Braskem said slowing demand for polyethylene was forcing it to idle ethylene lines at its two Brazilian steam crackers. The company thus reduced operating rates from 95% to 55%. How the downturn will play out is still uncertain, says Vitor Mallmann, CEO of Quattor, which became Brazil’s second largest petrochemical company in 2008 when some of the chemical assets of the conglomerate Unipar were merged with Petrobras. “The question now is how the crisis will affect demand,” he says. On the supply side, Mallmann anticipates the postponement of some new chemical plants on which construction might not have begun, such as those slated to open in 2011 or beyond. “We are facing an adjustment,” he says. The Latin American region itself is no stranger to petrochemical projects. Quattor may be part of a massive $8.5 billion plan to build a refinery and petrochemical complex in Rio de Janeiro in 2012. Mallmann, however, says his company is still working out issues such as feedstock pric-
ing and the market situation when the plant is scheduled to come online. Braskem has several projects in the region. It and Pequiven, the state chemical company of Venezuela, are planning a 1.3 million-metric-ton-per-year ethylene and derivatives complex for 2013. Elsewhere, Braskem, Petrobras, and PetroPeru are studying an ethylene com-
plex in Peru that could produce as much as 1.2 million tons per year of ethylene and polyethylene. Many of these plans, having not advanced much beyond the discussion phase, are in the category of projects that could slip if the economic downturn gets much worse and hits Latin America harder than is now expected. ■
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EUROPE A BLEAK MIDWINTER OUTLOOK points to a long year ahead PATRICIA L. SHORT, C&EN LONDON
ROGET’S THESAURUS includes a number of synonyms for “bleak”: gloomy, dismal, grim, somber, dark, dreary. All of them point to one outlook for the European chemical industry in 2009—it’s not going to be a pleasant year. Rapidly fluctuating raw material prices are causing customers to anticipate lower prices in the future. So they are using up stocks on hand, rather than routinely topping off inventories, which is disrupting demand. Chemical producers are temporarily idling plants to ride out drops in demand. But the longer the idling, the more chance producers will decide that a plant is no longer economical to operate or to justify new investment. That is particularly true if the plant and its production stand to be hard-hit by competition from Middle Eastern producers, which are set to bring massive amounts of new capacity onstream over the next several years. Those conclusions emerge from the forecasts of various consultants who follow the industry. The bleak view is also pinpointed in the latest forecast from the European Chemical Industry Council (CEFIC), which expects output in the chemical industry—excluding pharmaceuticals—to show an even greater decline than the 0.6% drop expected to be the final result of 2008. In fact, in their forecast published late last year, CEFIC economists predict that the drop that began in the last quarter of 2008 will continue in the coming months, resulting in a decline in chemical production of 1.3% for 2009. As CEFIC chief economist Moncef Hadhri points out, the 2008 drop was the first for the European chemical industry since 2003. After a modest start in the first quarter, output declined throughout the year—especially since the third quarter. During the second half of 2008, the effects of the economic crisis accelerated the downturn in key chemical industry customer sectors, including construction, automotive, and machinery and equipment. “The time of the booming world economy is already over. The world is now facing one of the greatest international
financial crises of the past decades,” Hadhri says. “The latest indicators show very clearly that world economic activity and the global business climate have worsened.” With such discouraging data in hand, CEFIC has revised downward its expectations for the coming six months. “The worldwide financial and real estate crisis and the latest turmoil in the stock market have clearly further slowed down the global economy,” Hadhri says. “The global economy is poised for a serious downturn [from] whose effects Europe will not be spared.” The downturn in basic industries such as automotive and construction have been well documented. But even industries such as consumer electronics—an industry sector traditionally resilient in economic downturns—is expected to be hit this year. When Nokia, the world’s largest cell-phone manufacturer, issued a
profit warning for the fourth quarter, the company said it expected global handset sales to fall in 2009 anywhere from 4% to 27%, depending upon the severity of the recession around the world. According to the CEFIC forecast, most chemical sectors will show a downward trend and experience a more severe decline in 2009 compared with 2008. Consumer chemicals such as household cleaning products are the only exception. For this sector, the expectation of zero growth for 2009 is an improvement from the 1.4% output drop it showed in 2008. “THIS YEAR will be very bleak,” agrees
Jonathan Tyler, a director specializing in the chemical industry at investment bank Houlihan Lokey. He recalls attending a chemical industry roundtable in November that “was dreadful,” he says. “The people were completely pessimistic, and they were from companies that were not in bad shape. They didn’t know what to do about their budgeting process for next year. Long-term is now 18 months.” He adds, “A lot of our work is restructuring. If things get bad enough, maybe the system will clear this quickly.” In fact, that’s about the only positive sign Tyler can see in the current situation. “Things
BASICS
European Union economic health continues to tumble, reining in consumer prices … % annual change for European Union Real gross 4
Consumer prices
domestic product
3 2 1 0
2000 01
02 03 04 05
06 07 08a 09a 2000 01 02 03 04 05 06 07 08a 09a
… and most major countries clearly show these trends % annual change 6
■ Real gross domestic product ■ Consumer prices
4 2 0
–2 2006 07 08a 09a 06 07 08a 09a 06 07 08a 09a 06 07 08a 09a 06 07 08a 09a 06 07 08a 09a Belgium
France
Germany
Italy
Netherlands
NOTE: Data for 2000–02 are for 25-member EU; data after 2002 are adjusted for EU-27. a Estimates. SOURCE: European Union
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U.K.
“The global economy is poised for a serious downturn [from] whose effects Europe will not be spared.”
may get so bad that actions get kickstarted and apathy goes,” he says. “Now, people are just sitting and waiting.” One way companies are delaying any action, points out David Thomas, senior industrial economist responsible for chemicals at the U.K. consulting firm Oxford Economics, is that they are postponing purchase of products for inventory. And that delay is having an immediate impact on demand. Companies are depleting supplies they have on hand rather than topping off stores, according to Thomas. He sees a good chance this will continue in 2009.
because of the rapid deterioration in raw material prices.” In the medium term, he and his colleagues expect the lower raw material costs across the industry and the strengthening U.S. dollar to benefit the export-oriented European chemical industry. He warns, however, that any such benefit will take “some time to flow through the value chain and could only be expected PRODUCTION BY SECTOR to help chemical producers Pharmaceuticals hold at low growth, from first-quarter 2009 at the but other sectors are set to decline earliest.” ANNUAL CHANGE
pickup this year,” Thomas says. “There will be a relatively sharp decline in the first quarter, and then a very slow recovery in the second quarter on through the year. Companies can’t run with no stocks forever.” Still, his forecast shows a decline in European chemical output of 1.6% for 2009. Thomas argues that “what is pulling the industry down” is the basic chemicals sector, which saw output declines of 6 to 7% in most European countries in the fourth quarter of last year. Consumer-oriented products such as paints and coatings haven’t been doing well, but have not seen a decline as sharp, he adds. The pharmaceuticals sector has been holding up well, Thomas notes, but its relatively impressive performance builds on “a lousy 2007.” Besides, in pharmaceuticals, “you don’t hold great amounts of stocks. The prices are fairly stable, so there is no incentive” to build up inventories. S&P’s Mock also sees basic chemicals as the weak spot for Europe. “The sluggish economic environment, overcapacities for petrochemicals, and high volatility of the oil price will result in a very weak trading environment for chemical producers in 2009,” he wrote. “We expect petrochemical producers and commodity producers to suffer most.” Mock sees weaker demand for specialty chemical companies as well. He added in his report, however, that these companies “should benefit somewhat from lower raw material costs. We therefore expect most
WITH DEMAND in a funk, companies have been taking Basic inorganics 1.7% 1.6% 0.3% -0.8% long end-of-the-year breaks. Consumer chemicals 4.2 3.9 -1.4 0.0 The European industry’s Petrochemicals 1.3 3.6 0.3 -1.5 Pharmaceuticals 8.1 3.3 2.4 2.4 traditional two-week shutPolymers 0.2 1.0 -0.9 -2.3 down over Christmas and Specialty & fine chemicals 3.4 1.0 -1.3 -1.2 New Year’s is stretching out to a third or fourth week for Chemicals excluding 2.1% 2.6% -0.6% -1.3% some as a clutch of chemical pharmaceuticals companies temporarily idle Chemicals including 3.8% 3.0% 0.2% -0.3% pharmaceuticals plants. Some of those temporarily a Estimates. SOURCE: European Chemical Industry Council idled plants “may not open again” cautions Oxford Economics’ Thomas. He cites the temporary “It depends on the state a company is in. If shuttering of two Terra Industries-Kemira it is strapped for cash, it will be buying as fertilizer plants in the U.K. “You don’t little as possible. Both chemical producers close these plants down for a week or and users are trying to run with the lowest two—they won’t start up again immediamount of stocks possible.” ately,” he says. Terra and other fertilizer Destocking, or the drawing down of producers have idled plants in the U.S. as inventory, has begun to a great extent bewell (C&EN, Jan. 5, page 10). cause of the rapid and dramatic changes in But the downturn won’t last forever. oil prices, industry analysts point out. To“We’ve got, in our forecast, a fairly slow bias Mock, primary credit analyst responsible for chemicals at Standard & Poor’s in Frankfurt, notes that “the rapidly falling CURRENCY COMPARISON oil price and overcapacities in the petroEuropean currencies began to weaken in late summer 2008 chemical segment have resulted in price declines for key commodity chemicals of Relative value of the U.S. dollar versus European currencies, January 2005 = 1.00 more than 50% from the peak in August 1.4 ■ British pound 2008.” That drop resulted, he adds, “in ■ Swiss franc significant inventory destocking at cus1.2 ■ Euro tomer levels, because they hope to be able to buy products at cheaper prices in a few 1.0 months time.” In his latest chemical industry rating, 0.8 published in December, Mock wrote, 2005 2006 2007 2008 “We also expect the majority of comSOURCE: U.S. Federal Reserve panies to show inventory write-downs 2006
2007
2008a
2009a
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of them to weather the uncertainties better than commodity producers.” There is even a bright star—everything is relative this year—in the agrochemicals sector, according to Mock. For agrochemical producers, “the significant decline in crop prices should also somewhat negatively affect profitability, but we still expect them to show solid earnings because the slowing economy should have only a minimal impact.” Likewise, industrial gas producers “should weather the storm quite well because their business model easily absorbs the risks, although we also expect them to show somewhat lower earnings in the coming years.” And lower earnings, in turn, have an impact on investments for all companies, Thomas points out. As he sees it, companies will happily invest in plant maintenance because it allows them to take facilities off-line for a while. But as to other investments, he says, “those tend to need cash, and cash is short. Companies would like to upgrade, but they will be very wary.” Nor will there be any major additions to capacity, Thomas says. The major reason is the specter of capacity waiting to start up in the Middle East. All European producers of basic chemicals will be bracing for Middle Eastern competition, which is why “there will be a chance that some of these plants won’t reopen. People won’t be willing to spend money
CHEMICAL PRODUCTION
European output maintained strong showing through 2008 THOUSANDS OF METRIC TONS a
Ammonia Chlorineb Ethylenec Propylenea Sulfuric acida
2004
2005
2006
2007
12,364 9,856 21,408 15,123 16,584
13,187 10,382 21,600 15,406 16,609
3,915 10,315 21,192 15,291 9,471
4,032 10,610 21,818 15,670 9,741
2008
4,198 10,430 21,449 15,736 10,582
CHANGE 2007-08
4.1% -1.7 -1.7 0.4 8.6
a Figure for 2008 is a C&EN estimate based on partial reporting. b Figure for 2008 is based on 11 months’ reporting. c Figure for 2008 is based on 9 months’ reporting. SOURCES: Association of Petrochemical Producers in Europe, Eurochlor, Eurostat, national statistics offices
unless they’re sure they’ll need it. I think 2009, as far as investment goes, will be dead,” he emphasizes. New Middle Eastern chemical capacity definitely poses challenges for European chemical producers, agrees Chris Stirling, European head for chemicals and pharmaceuticals analysis for consultants KPMG. “We don’t see a lot of light for the next year,” he says. “Most of the chemical sectors will get squeezed, and margins will be tighter and tighter because demand is so weak. And the long-term is not brilliant because of all the capacity coming on in the Mideast.” Although delays have been announced for some projects in that region, Stirling notes, many will be completed on schedule, putting ever more pressure on European chemical companies. Stirling addressed the prospect of Middle Eastern PRODUCTION BY COUNTRY competition in a report on Negative growth is forecast for major European the European chemical induscountries except Russia try published last month by KPMG. “With an abundant Belgium ■ 2009a supply of cheap oil and gas rea ■ 2008 serves, Middle Eastern chemi■ 2007 France ■ 2006 cals companies can access Germany natural resources at greatly discounted prices when comItaly pared to their Western neighNetherlands bors,” he wrote. “The Middle East-based Russia companies have made the Spain most of their natural resource and transformed their busiSwitzerland ness from a supply of raw U.K. material to heavyweight, global petrochemicals production,” –4 –2 0 2 4 6 8 the report says. “Our research % change in chemical output from shows that 53 plants could the previous year come onstream by 2012, which, a Estimates. if taken together with investSOURCES: European Chemical Industry Council, Oxford Economics ment in Asia, could lead to EuWWW.CEN-ONLI NE.ORG
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JANUARY 12, 2009
ropean players being marginalized on the global market.” Stirling points out that the Middle Eastern chemical industry grew at 9.0% per year from 1997 to 2007. “We forecast that the region will grow at an average 9.5% per year until 2020, more than twice the global average,” he says. ACCORDING TO the report, chemicals
is the European Union’s third biggest industrial sector, but innovation levels have been falling due to high levels of regulation and difficulties attracting workers with a sufficient skills base. The European market is also highly fragmented and ripe for mergers and acquisitions (M&A). “While the credit crisis has impacted M&A levels in all industries, our research shows that this could act as a catalyst to drive further market consolidation as wellcapitalized trade buyers take advantage of the lack of competition from financial investors such as private equity houses,” Stirling wrote. He points out a few self-help steps that European companies can take in the short-term. But in his opinion, the challenge to the industry “is to make the most of an historic upper hand in innovation and team up with Middle Eastern companies to access their resource advantages.” European firms, Stirling adds, are under pressure to review their basic strategies. And such reviews might, in turn, impact the region’s merger activity. “M&A will be pretty tough,” he concedes. “But there will be some distress situations. I wouldn’t be surprised if some of the more robust players take advantage of this.” Stirling adds, “The chemical industry is as cyclical as one can find. It’s better to invest at the bottom than at the top.” But he acknowledges that raises the obvious question: “Where are we now relative to the bottom? There is probably a little way to go yet.” ■
COVE R STO RY
ASIA-PACIFIC After several strong years, GROWTH STALLS throughout the region JEAN-FRANÇOIS TREMBLAY, C&EN HONG KONG
still operating are for the most part just barely covering their production costs. “Profit margins have fallen to zero on a cash basis,” he says. One of the main factors in the falling chemical demand is that China’s exportoriented industries, which include clothing and toy manufacturing, are producing fewer goods because orders from customers in the U.S. and Europe have shrunk or even evaporated entirely. Hundreds of export-oriented factories have closed down in southern China in recent months. The clothing and toy industries are major users of petrochemical products such as polyester fiber and polyvinyl chloride resin. The near-term outlook in Asia is, if anything, worsening. In December 2008, economists at the Asian Development Bank revised downward the economic predictions they had made just two months earlier. “As the global crisis spreads to Asia, the risk is on the downside,” Jong-Wha Lee, ADB’s head of regional economic integration, said in Hong Kong at a press conference at the Foreign Correspondants’ Club in December. He added that the economic picture has been shifting, forcing ADB economists to revise the assumptions in their forecasts.
AS RECENTLY as August, the mood GROSS DOMESTIC PRODUCT in Asia was euphoric. The world Growth has slowed in most countries, and a was dazzled by China’s extravagant contraction is forecast for Japan Olympics, and the Asian chemical industry was in the midst of five years of uninterrupted prosperity. Since Australia then, conditions in the region have rapidly deteriorated. For chemical China makers, the situation is the worst in Hong Kong memory. Things are particularly bad in the India petrochemical sector. Because of Indonesia sharply reduced demand, producers in China, Japan, Taiwan, Thailand, Japan and South Korea have cut operating rates, closed facilities, and performed Malaysia maintenance shutdowns earlier than scheduled. Pakistan The forecast is not universally so Philippines dismal. For example, the outlook for butadiene, caustic soda, polysilicon, Singapore and carbon fiber producers is favorSouth Korea ■ 2009a able. And each of the region’s three ■ 2008a largest economies has something to ■ 2007 Taiwan ■ 2006 be optimistic about. China’s economy is projected to grow by a still hefty Thailand 8.2%; in Japan, suppliers of display BUT THERE IS a limit to how bad Vietnam materials expect growth in the second conditions in Asia will become, Lee half; and in India, industry leaders are predicted. He said the region is in –2 0 2 4 6 8 10 12 confident about near-term prospects. much better shape than just before % change in gross domestic product These positive factors are mere the onset of the Asian financial crisis from the previous year drops in the gloomy bucket, however. of 1997–98 because Asian banks now a Estimates. SOURCES: Asian Development Bank; Organization for Overall, 2009 will be an extremely boast much stronger balance sheets Economic Cooperation & Development (Australia) difficult year. than they did back then. On an even “Demand has dropped so dramatibrighter note, Lee added, the current cialty chemicals fell 28%. EDB attributes the cally in the fourth quarter that roughly 25% regional slowdown will provide some space declines to a drop in export orders and an of capacity has been shut down, give or for fast-growing Asian economies to take increase in maintenance shutdowns. take 10% depending on the chemical,” says steps toward making their growth more Asia’s production cutbacks are due in Steve Zinger, managing director for Asia sustainable. part to an effort by chemical makers to at the consulting firm Chemical Market And developing countries such as China reduce inventories, Zinger says. But even Associates Inc. (CMAI). “It’s really unprechave plenty of space to slow down. Deafter inventories are drawn down, he exedented to see that much shut down.” spite its ebbing exports, China’s economy pects that producers in the region will not In Singapore, where the chemical induswill grow by a substantial 8.2% this year, operate their facilities at much more than try is export-oriented because of the cityADB predicts, just slightly less than the 85% of capacity. state’s small market, production of petrosizzling 9.5% the agency says the country The petrochemical industry’s output chemicals dropped nearly 32% in November achieved in 2008. ADB contends that the cuts have restored the balance between 2008 compared with the same period in $600 billion stimulus package the Chinese supply and demand for the time being, 2007, according to the Singapore Economic government announced in November “is Zinger adds. But he notes that those firms Development Board. Production of spea significant proactive way to counter the economic risks from deteriorating global and domestic growth prospects.” For what major Asian companies forecast for 2009, go to C&EN MORE ONLINE Online at www.cen-online.org. By contrast, the Japanese economy, WWW.CEN-ONLI NE.ORG
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That even a well-oiled corporate machine like Shin-Etsu is faltering at this time is a bad omen for the rest of the chemical industry in Asia. which is about one-third larger than China’s, will shrink by 0.2% this year, ADB expects. The Japanese Ministry of Economy, Trade & Industry says industrial output in Japan fell more than 8% in November 2008 compared with October 2008. The contraction is mostly due to lower global demand for Japanese goods. In these conditions, chemical companies in Japan are exceptionally pessimistic about their near-term future. Diversified producers Sumitomo Chemical and Mitsubishi Chemical both expect their net profit in the fiscal year that ends on March 31 to be only about one-quarter of what they achieved during the previous fiscal year. The companies produce a wide range of basic chemicals, petrochemicals, electronic materials, crop protection products, pharmaceutical ingredients, and finished drugs. But they may not be able to achieve even their modest financial targets. The two firms issued their downbeat profit forecasts
before auto manufacturers—big consumers of chemicals and plastics—announced they would be cutting production to cope with mounting inventories of unsold vehicles. Japan’s car output in November 2008 was 20% lower than it was in November 2007, and the carmaker Toyota is expecting its first financial loss in 70 years this fiscal year. In the early part of 2008, one bright spot in Japan was strong global demand for electronic materials, particularly display components. In the first half of the fiscal year, Sumitomo Chemical improved its margins on sales of electronic materials even as the profitability of its other businesses deteriorated. But the outlook is darkening for this segment as well. The flat-panel display industry has been experiencing boom-bust cycles spaced roughly two years apart. Nitto Denko, the world’s leading supplier of polarizers used in liquid-crystal displays (LCDs), says that demand for its products is weakening and that the situa-
JAPAN CHEMICAL PRODUCTION
Olefins and ammonia production dropped sharply in 2008 THOUSANDS OF METRIC TONS
2004
2005
2006
2007
2008a
CHANGE 2007–08
Ammonia Chlorine Ethylene Propylene Sulfuric acid
1,340 619 7,570 5,767 6,444
1,318 601 7,618 6,030 6,546
1,328 571 7,522 6,090 6,843
1,355 550 7,739 6,286 7,098
1,262 542 7,163 5,918 7,315
-6.9% -1.5 -7.4 -5.9 3.1
a Estimates. SOURCE: Ministry of Economy, Trade & Industry
tion will last at least until the spring. The company, which exports a substantial portion of its output, expects its yen-denominated profit to decline because of the strength of the Japanese currency. Conditions for Nitto and other suppliers of display components could improve in the second half of the year, however. The consulting firm iSuppli expects production of LCD television sets to increase by more than 20% in 2009. Much of the growth will take place in the second half, iSuppli predicts, as consumers are enticed by falling prices for flat-screen TVs. IN INDIA, the third largest Asian economy after Japan and China, industry leaders are relatively optimistic about the near-term outlook. Generic drug manufacturer Ranbaxy Laboratories, which in November was acquired by the Japanese pharmaceutical company Daiichi Sankyo, is confident that it will boost sales in emerging markets. It lost some U.S. business after the Food & Drug Administration deemed that a few of its facilities did not comply with current Good Manufacturing Practices. Petrochemical giant Reliance Industries expects to maintain profit margins despite weakness in demand. Moreover, Asia offers a few rays of hope for companies that make certain types of products or that are positioning themselves to grow after this downturn. Looking at the Asian petrochemical industry beyond 2009, analysts at the finan-
CHINA TRADE
Chemical trade surged last year, particularly in pharmaceuticals $ MILLIONS
Inorganic chemicalsb Organic chemicals Pharmaceutical products Fertilizers Dyes & pigments Otherc,d ALL CHEMICALSd
2005 EXPORTS IMPORTS
2006 EXPORTS IMPORTS
2007 EXPORTS IMPORTS
2008a EXPORTS IMPORTS
CHANGE 2007–08 EXPORTS IMPORTS
$6,944 12,133 1,364 1,011 2,487 7,914
$4,812 28,019 1,959 3,051 3,081 9,661
$7,626 15,542 1,531 1,169 3,000 8,884
$6,287 29,859 2,394 2,484 3,507 11,653
$9,678 20,608 2,052 3,741 3,578 11,458
$6,426 38,377 3,458 2,906 3,805 13,551
$13,880 25,118 8,190 4,922 3,872 26,386
$7,483 42,421 5,458 3,290 4,248 62,848
43.4% 21.9 299.1 31.6 8.2 130.3
16.5% 10.5 57.8 13.2 11.6 363.8
$31,853
$50,583
$37,752
$56,184
$51,115
$68,523
$82,369
$125,748
61.1%
83.5%
a Estimates. b Includes compounds of precious metals and rare earths. c Calculated by C&EN. d Data for 2008 include bulk plastics. SOURCE: Customs General Administration of the People’s Republic of China
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JANUARY 12, 2009
cial research company Macquarie expect that oil and chemical producers Sinopec, PetroChina, and Reliance will emerge from the downturn in a stronger position than their rivals in the rest of Asia. This is because, the analysts say, the three giants are building new low-cost facilities that will put them at a competitive advantage when demand in Asia starts to rebound. And in a weird way, collapsing Asian chemical demand has improved conditions for certain products, CMAI’s Zinger notes. For instance, the outlook for butadiene pricing is relatively good. Butadiene is made by petrochemical complexes that use naphtha as a feedstock, something that almost all Asian petrochemical complexes do. The lower cost producers in the Middle
tion in 2012. Tokuyama says that demand for polysilicon used in making photovoltaic cells is growing rapidly and that it is receiving many orders. Japan’s Toray Industries, meanwhile, is confident in the strength of demand for car parts made from carbon fiber. In December, it acquired a 21% stake in Advanced Composite Engineering, a German producer of advanced composites. Toray expects that concern about global warming will induce car manufacturers to reduce the weight of vehicles to improve mileage. Using carbon fiber composites is one way to get there. But beyond these bright spots in a few sectors of the chemical industry, the overall picture for 2009 is unmistakably bleak.
CURRENCY COMPARISON
The dollar has gained value against the won and rupee but has weakened against other currencies Relative value of the U.S. dollar versus major Asia-Pacific currencies, January 2005 = 1.00 1.4
1.2 1.0 0.8
2005 ■ Australian dollar
2006 ■ Chinese renminbi
2007 ■ Indian rupee ■ Japanese yen
2008 ■ Korean won
SOURCE: U.S. Federal Reserve
East, in contrast, use natural gas as a feedstock and don’t produce much butadiene. Faced with lower global demand, Asian producers will be forced to cut back before the Middle Eastern firms, leading to a relatively tight butadiene market, Zinger says. Similarly, the outlook for producers of caustic soda, or sodium hydroxide, is rather positive. This is because most caustic soda is coproduced with chlorine at plants dedicated to the polyvinyl chloride market. In recent months, these firms have cut output of chlorine, taking caustic soda production down with it. But caustic soda is a less cyclical product that goes into a wide variety of applications. Users of caustic soda have been bidding up prices as a result, Zinger says. And the solar industry is still experiencing growth in Asia, just as it is in the rest of the world. Japan’s Tokuyama, a leading producer of polysilicon, will invest $535 million to build a 3,000-metric-ton-peryear plant in Borneo that will begin produc-
One piece of evidence is a profit warning that Japan’s Shin-Etsu Chemical issued in mid-December. Shin-Etsu is the world’s largest producer of both silicon wafers and polyvinyl chloride resins. The company did not announce a new profit forecast, but it warned investors that it was unlikely to meet the profit targets it had made at the end of April 2008. “The effects of the severe downturn in market conditions since November have gone far beyond the limits of the company’s management efforts,” Shin-Etsu stated. The warning is significant because the company had been delivering record profits uninterruptedly for the past 12 years, through the ups and downs of both the electronics and the petrochemical industries. And until December, it was working toward another year of record profits. That even a well-oiled corporate machine like Shin-Etsu is faltering at this time is a bad omen for the rest of the chemical industry in Asia. ■
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