COVER STORY
WORLD CHEMICAL OUTLOOK
T
H E C H E M I C A L I N D U S T R Y I N M O S T PARTS O F T H E
world is, at last, showing signs of recovery And it is a welcome experience for company executives and employees, investors, researchers, and construction workers. The industry was suffering even before the recession officially began in March 2001, cutting profits, stock prices, workforces, and capital spending along with adding a host of other costs. This year's world outlook, however, shows great variations among individual countries. In the U.S. in 2003, the chemical industry should show fairly solid growth in sales and earnings, though probably not at prerecessionary levels. Employment, R&D, and especially capital spending will grow as demand improves. However, the chemical trade deficit will swell. In Canada, the recovery will continue on volume increases. Prices, which declined last year, are projected to stabilize in 2003, boosting revenues. Mexico, the other member of the NAFTA trio, will also show growth this year. In other Latin American chemical-producing countries, Chile, Brazil, Argentina, and Venezuela are expected to show modest HTTP://WWW.CEN-ONLINE.ORG
16 19 21 23 27
UNITED STATES CANADA LATIN AMERICA EUROPE ASIA-PACIFIC
growth, although political instability remains a wild card in the region. In Europe, the chemical industry in European Union countries will grow at about the same 3.0% rate seen in 2002, but growth in the so-called transition countries—consisting mainly of Southeast European and Commonwealth of Independent States nations—will outperform that of the EU nations. Asia also has to be taken on a countryby-country basis, with chemical growth reflecting a range of performances, from a 7.2% increase in demand in China to continuing economic problems in Japan. World Chemical Outlook this year was compiled by William Storck, senior correspondent, and Alexander Tullo, associate editor, inNewJersey; Patricia Short, senior correspondent, in London; andJean-Francois Tremblay Hong Kong bureau head. C&EN
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COVER STORY
UNITED STATES Chemicals finally showed some signs of life in 2002; this year should be better
cals will hit $6 billion. Despite the decline of the dollar against major foreign currencies in the latter half of 2002, she believes the dollar is still high, making foreign products very attractive and U.S. products expensive overseas.
ACCORDING TO ACC's outlook for 2003, a fall in the value of the dollar will improve U.S. export potential, but imports will continue to increase, although at a slower pace The big victim of 2002 was the venerthan last year. able chemical trade surplus. The surplus, Although the chemical industry is now which had continued unabated since World adding to the U.S. trade deficit instead of War I, finally gave way to a deficit in 2002. moderating it, the overall economy seems Originally expected to be about $2 bilto be growing, adding to the prospects for lion, the chemical trade deficit for 2002 chemicals in the US,, will be about twice the foreEstimates are that the govcast—totaling some $4.2 bilernment's measure of gross dolion—when the final figures for mestic product last year increased the year are published by the between 2.3 and 2.5%. In 2001, Commerce Department. This is GDP was up just 0.3%. Personnot to say that chemical exports al consumption expenditures are languishing. T h e value of have fueled the increase, rising chemical and allied products exan estimated 3.1% last year, acports increased about 1% in W0RLD cording to a survey by the Na2002 to an estimated $81.2 bilCHEMICAL tional Association for Business lion. But imports of chemicals OUTLOOK Economics. into the U.S. soared some 8.0% This, however, is causing some consterto about $85.4 billion. nation because NABE and other surveys Of the eight major chemical sectors expect personal consumption growth to tracked by the government, just three— slow this year. Most economists believe organic chemicals, inorganic chemicals, that if business expenditures don't pickup and pharmaceuticals—posted trade from an estimated decline of about 5.5% deficits. The deficit in inorganics was the smallest— $461 million, less than the $575 last year and make up for slower personal consumption spending, economic growth million deficit in 2001—but the deficits maybe slowed. in the other two segments were much more NABE President Tim O'Neill, execusignificant. The deficit in organic chemitive vice president and chief economist of cals grew from $13.3 billion to $13-5 bilBMO Financial Group, a unit of the Bank lion. And the pharmaceuticals deficit of Montreal, says, "Unresolved economic soared to $8.43 billion from $3.69 billion. problems, specifically a hangover from the The reversal of the trade surplus is golate 1990s investment bubble, plus the need ing to get much worse, according to Martha for families to rebuild their savings, are Gilchrist Moore, senior economist with likely to keep US. growth below a 3% rate the American Chemistry Council, who in the first quarter of 2003." He does say predicts that the 2003 deficit for chemi-
W I L L I A M J . S T O R C K , C & E N N O R T H E A S T NEWS B U R E A U
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HEN C&EN PUBLISHED ITS
2002 forecast of the U.S. chemical economy a year ago, we said, "The chemical industry should post modest increases against a discouraging 2001."This was an overstatement. In many respects, "modest" was too strong to describe industry growth. For instance, total chemical production last year was up just about 2.0% over 2001, according to recently revised government data, while average prices for the year increased just 0.3%. For the basic chemical category production growth was better, averaging a 7.0% rise, but this was offset by a 0.5% decline in prices. Companies continued to cut employment to lower costs. Most of the cuts came from the ranks of production employees simply because production levels in many parts of the industry could not sustain the need for plant workers.
THE RESULT has been poor-to-mediocre financial performance among U.S. chemical companies for much of 2 0 0 2 . Although C&EN's regular sample of 25 chemical companies started the year off with lower sales figures and flat earnings in the first half, combined earnings suddenly shot up 43.0% in the third quarter over where they had been in the same three-month period of 2001. Agood part of this increase has to be credited to DuPont's 213% earnings rise, which it attributed largely to lower tax rates. Without DuPont, the remaining 24 companies had an aggregate earnTRADE ings increase of just 12.8%. I m p o r t s j u m p e d a g a i n in 2 0 0 2 , w h i l e e x p o r t s However, the good third quarter was not enough to have much efEXPORTS 2001 $ MILLIONS 2000 1999 fect on the year; it's going to take Organic chemicals $15,376 $17,990 $16,424 an equally good final period, which 5,578 Inorganic chemicals 5,359 4,632 will start to be reported by compaPlastics 19,519 18,485 16,832 nies later this month, to do that. 2,077 Fertilizers 2,249 2,921 Even with the healthy third-quarter Pharmaceuticals 12,893 15,031 11,203 increase, earnings from operations, 5,825 Cosmetics 5,292 4,853 excluding significant unusual items, 4,089 3,782 Dyes & colorants 3,620 rose only 9.3% through the first Other 12,264 12,382 11,068 $70,505 $79,655 $80,515 nine months. And sales through the TOTAL third quarter were still down 3.4% a C&EN estimates. SOURCE: Bureau of the Census from year-earlier levels. 16
C&EN
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2003
rose a little IMPORTS 2000 2001 2002a 2002a 1999 $16,451 $21,896 $28,578 $29,712 $30,000 6,153 5,982 6,104 5,521 5,167 10,647 10,401 10,812 9,279 19,453 1,607 1,684 1,890 1,980 1,501 18,628 24,209 13,497 14,685 15,774 4,249 3,539 3,750 5,927 3,148 2,478 2,391 2,667 3,894 2,633 5,927 6,115 5,725 12,181 5,084 $81,181 $62,205 $73,629 $79,100 $85,365
HTTP://WWW.CEN-ONLINE.ORG
U.S. TRADE Total deficit increased.
... and a chemical deficit appeared
$ Billions
$ Billions
1,200
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1,000
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199293 94 95 96 97 98 99 00 01 02*
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a C&EN estimates. SOURCE: Bureau of the Census
however, that the Federal Reserve Board's 0.5% interest rate cut "should help the faltering economy and ensure that growth heads back above 3% later in the year." In a survey taken in November by the Federal Reserve Bank of Philadelphia, economists lowered their forecast of economic growth this year to 3.0% from the 3.4% they predicted in a survey taken three months earlier. However, they believe growth will build throughout the year from an annual rate of 2.6% in the first quarter to 4.2% in the fourth quarter.
MARKET CONDITIONS Chemical output will rise, as will prices this year Industrial production index, 1997 = 100 110 100 90 80
1 III
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1
2000 2001 2002* 2003' • Chemicals & allied products • Industrial ci a C&EN estimates. SOURCES: Federal Reserve Board, I
BUT JUST TWO weeks ago, something of a wild card was thrown into the pot. The Institute for Supply Management—formerly the National Association of Purchasing Management—published its purchasing managers index (PMI) for December. The index is derived from a survey of the group's members and is one of the first measures of business activity reported each month. It includes a number of business factors such as production, new orders, employment, inventories, and prices. When the index for December was released on Jan. 2, it showed that the indicator, which had been contracting for four months, suddenly jumped 5.5 points to 54.7. If the index is below 50, ISM says, then manufacturing activity is contracting; above 50, it is expanding. Norbert J. Ore, chair of ISM's manufacturing business survey committee and group director for strategic sourcing and procurement at Georgia-Pacific, says: "A strong showing in new orders drove the PMI upward, while the production index strengthened and helped push the PMI up by 5.5 percentage points. The question at this point is whether the manufacturing sector can continue to gather momentum during the first quarter of 2003." It's not only economists who are being cautious in their forecasts; so are chemical HTTP://WWW.CEN-ONLINE.ORG
ACC is on-board the second-half recovery train. Its annual forecast says, 'Although industrial activity has decelerated, we expect a global recovery to emerge and gather strength in the second half of 2003." For the U.S. chemical industry, ACC is somewhat optimistic. Kevin Swift, senior director for policy, economics, and risk analysis, sees 3.5% growth in physical chemical volume this year, well above G D P growth, providing a 4.3% rise in the value of shipments to $483.5 billion. This contrasts with modest growth ofjust 2.0% in 2002, when business was hampered by the slow pace of the recovery, the high val-
company executives. William S. Stavropoulos, when taking over as president and chief executive officer of Dow Chemical from the ousted Michael D Parker, said of the company's scheduled cost-cutting measures: "This effort is going to be far-reaching, touching every part of the company The bottom line is that we only spend money on the essentials." Parker had earlier said the company would cut 2 0 0 3 capital spending by 20%, a statement that Stavropoulos has not cancelled. Industry observers say these actions are very unlike Dow Historically, the company has spent money in a soft economy especially on plants and equipment, so it is ahead of the competition at the beginning of an expansion. And some executive comments sound as if they were made ayear ago, when forecasters were predicting a slow first half for 2002, followed by higher growth in the second half. In a warning that Rohm and Haas's fourth-quarter earnings would be much lower than analysts expected, Chairman and CEO Raj L. Gupta said of this year, "We expect to show strong sales comparisons from the start of the year and anticipate more favorable earnings comparisons in the second half of 2003."
Producer price index, 1982 = 100 1601 150
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140 130 120 110
I ~l T I I I I I I I 2000
2001
2002*
2003"
eau of Labor Statistics
ue of the dollar, and swings in downstream inventories. According to the ACC study the life sciences sector will lead the way with 5.5% growth in the value of shipments to $ 152.2 billion. Pharmaceuticals will rise 5.8% to $ 1379 billion, while crop protection will lag with a 3.0% growth rate to $14.3 billion. Specialty chemicals will show a 4.3% growth rate, matching that for all chemicals, to $ 112.4 billion, with 5.5% growth in plastic compounding and 5.0% growth in industrial and institutional cleaners. Catalysts will match the 4.3% average rate for the group. BASIC CHEMICAL shipments are expected to grow 3.8% this year to $166.8 billion. The long-suffering fertilizer industry will lead the basics segment with a 5.0% increase, followed by a 4.8% increase in petrochemicals and intermediates and a 4.3% increase in inorganic chemicals. In the last few months for which data are available, chemical industry inventories have been rising, but fortunately they have lagged behind the increases in shipments, driving the inventories-to-shipments ratio lower. On a three-month moving average basis, the ratio declined from a 2002 C & E N / J A N U A R Y 13, 2003
17
COVER STORY
DEMAND Chemical shipments rose faster than inventories, driving ratio down Millions 38 37 36
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NOTE: Three-month moving average. SOURCE: Department of Commerce
high of 1.48 in February to a more respectable 1.39 in November. Customer inventories are another story. Low inventories at the customer level generally indicate increased future demand for products. However, ISM reports that the chemical industry is one of just a few industries that saw excessive customer inventories during December. Most of the other respondents to the monthly survey indicated that their custo-
mers do not have sufficient stocks on hand. The two major uncertainties in the world right now— a possible war with Iraq and t h e strikes that have shut down Venezuela's oil industry—could have a huge effect on U.S. chemicals in the form ofhigher feedstock and energy costs. Most economists believe that a war with Iraq would cause economic disruptions around the world, but they would be fairly brief. However, predicting what will happen in
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18
a war is probably more uncertain than predicting the ups and downs of the stock market—and the consequences of a war would be much more serious than fluctuations in the market. The ACC survey says of energy costs, "Constraints still continue to present challenges until a secure and diversified energy supply is ensured in the U.S." The survey indicates that feedstock costs may rise about 4.0% this year, with other energy costs increasing about 5.0%. Other points of the ACC survey: • Chemical capacity utilization will increase to an average of 79.5% from 77.8% in 2002. • Earnings before taxes, depreciation, and amortization will rise 8.2%. • R&D spending will improve 2.9%. • Chemical industry capital spending, which economists say is sorely needed to fuel the recovery should jump 6.9%.
C & E N / J A N U A R Y 13, 2003
Polysciences, Inc.
Millions, seasonally adjusted 1.030 f
2001
2002
SOURCE: Bureau of Labor Statistics
Thus, barring disruptions—a big if— 2003 should be a year of rebuilding for the U.S. chemical industry Awar with Iraq, however, could be disruptive and could destabilize trade, downstream industries, and even governments in politically sensitive oil-producing countries. • HTTP://WWW.CEN-ONLINE.ORG
COVER STORY ports, especially in the chemical business, that we need the U.S. economy to be chugging along to have a strong year," he says.
CANADA Industry is recovering from a decline in 2001 and pondering its long-term direction ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU
T
HERE WAS A MODEST RECOVERY general manager of petrochemicals for last year in the Canadian chemExxonMobil's Canadian affiliate, Imperiical industry, and observers exal Oil, agrees there was a modest recovery pect more improvement in in 2002. "What we saw coming into the 2003. However, the industry year was a very weak environment," he says. north of the U.S. border is still pondering "By the start of the second quarter and inits long-term health. to the third quarter, things had picked up and were quite strong." But, he notes, busiPerhaps the most positive sign for the ness slowed down again by the end of the Canadian industry is that volumes for most year. industrial chemicals are expected to have increased in 2002, with important CanaVince J. Smith, president and chief exdian products such as ethylene and polyecutive officer of Dow Canada, is less bullethylene posting double-digit gains. Prices, ish on the chemical recovery "Because the for the most part, declined from 2001, a large commodity products go into the U.S. year that began with a huge runmarket, we see slow industrial up in raw material costs that indemand," he says. 'And because flated chemical prices. of that, we have not seen very Shipments, which reflect pricmuch recovery at all in 2002— ing, showed a more modest reif anything, the second and third covery than volumes, with the quarters were flat." entire chemical business experShearing says one difference iencing some improvement but between the U.S. and Canadian WORLD with sectors like fertilizers, baindustries is profitability From CHEMICAL sic chemicals, and polymer-based 1999 to 2002, the profitability OUTLOOK goods losing a little ground. On of the Canadian industry has a negative note, Canada's chembeen higher than that of the U.S., ical trade deficit increased yet again, hithe maintains. "It is a good indication that ting $8.2 billion. the industry is weathering what has hapDavid Shearing, senior manager of busipened in the U.S.," Shearing adds. He exness and economics for the Canadian pects Canadian profits to continue to imChemical Producers'Association (CCPA), prove this year. believes that the recovery will continue Griffiths says the strength of the Canathis year. "Volume is expected to increase dian chemical recovery in 2003 hinges on into 2003; so are revenues, because prices the U.S. "For us to have a stronger year than will remain constant," he says. 2002, the U.S. economy has to be strong. J. S. (Steve) Griffiths, vice president and We depend so much on the U.S. for our ex-
ANOTHER DARK CLOUD overthe Canadian industry is natural gas prices, which nearly doubled in2002, hittingmore than $5.00 per million Btu in December. Though this isn't nearly as severe as two years ago, when they quadrupled and peaked at about $10, Canadian ethylene makers, who are tapped into gas-rich Alberta, are concerned. "Natural gas prices are high and potentially can get higher, and chemical demand is soft and prices are softening. % u get the worst possible combination," Griffiths says. Rick Henson, vice president of petrochemicals and feedstocks at Nova Chemicals, has witnessed an erosion of the Alberta advantage—the raw material cost and economies of scale advantage that Alberta's ethane-based ethylene crackers enjoy over the Gulf Coast. Last year, he says, the advantage declined to 4 cents per lb of ethylene produced versus the usual 6 cents. Moreover, when natural gas spiked in 2000, crude oil didn't move along with it. Ethane-based plants closed; naphthabased plants ran at full throttle; and plants that could switched to heavier, petroleumbased feedstocks to reduce costs. There is less flexibility this time around, Imperial's Griffiths says. "This year, petroleum and natural gas prices are moving more in lockstep," he explains. " % u don't have the opportunity to switch back and forth to moderate the impact." Another problem, Dow^s Smith says, is that costs are increasing faster than revenues. "We continue to see high oil and gas prices and, in most cases, we haven't been able to reflect them in the price ofour products," he says, fearing a repeat of the 2000 crisis. "When we saw the run-up of gas to
SHIPMENTS
PRICES
Overall improvement, but some segments declined
After a two-year jump, prices fell in 2002
$ Billions (U.S.]
Price index, 1997 = 100
Chemicals & chemical products
60 1992 93 NOTE: All data converted at exchange rate of $1.00 U.S. = $1.549 Canadian. a C&EN estimates. SOURCE: Statistics Canada
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C & E N / J A N U A R Y 13, 2003
19
COVER STORY PRODUCTION Most Chemicals in Canada improved over a poor 2001 1998
1999
2000
2001
2002a
CHANGE 2001-02
Ammonia Ammonium nitrate Benzene Butadiene
4,737 1,000 718 236
4,889 1,052 806 228
4,888 1,110 859 252
4,297 1,174 751 245
4,446 1,163 848 275
3.5% -0.9 12.9 12.3
Chlorine Ethylene Hydrochloric acid, 100% Nitric acid
989 3,557 149 935
1,068 3,851 161 1,007
1,079 4,069 155 1,074
1,054 4,261 143 1,054
1,107 4,793 151 1,174
5.0 12.5 5.9 11.4
Polyethyleneb Polystyrenec Propylene Sodium chlorate
2,283 180 1,038 1,012
2,482 200 999 1,048
2,644 203 934 1,107
2,986 186 882 1,082 ,
3,354 198 965 1,044
12.3 6.5 9.4 -3.6
Sodium hydroxide Sulfuric acid Toluene Urea Xylenes
1,015 4,333 222 3,714 308
1,076 4,183 262 3,832 253
1,094 3,804 218 3,887 312
1,074 3,843 222 3,363 271
1,124 3,990 263 3,308 302
4.7 3.8 18.7 -1.6 11.4
THOUSANDS OF METRIC TONS
a C&EN estimates, b Includes low-, linear low-, and high-density resins, c Includes acrylonitrile-butadienestyrene resins. SOURCE: Statistics Canada
$ 10, we were not able to pass it on to many of the products that are produced from gas. We can't go through times like that again." However, this time around, producers contend that they are better prepared because they have adopted risk management strategies. "We are constantly looking at ways to minimize the impact of a run-up like that," Smith says. "We need to do a better job ofgetting through if, by chance, gas spikes up again to $10." FEEDSTOCKS are also a concern to the long-term health of the industry Globally ethylene production is either shifting to Asia, where the new markets are, or the Middle East, which has the cheapest feedstocks. Canada is pondering this trend just as the U.S. has been. So far, Shearing says, capital expenditures haven't been affected by these broad global shifts. He says spending peaked in 1999, as Nova and Union Carbide finished the massive cracker and polyethylene plants inJoffre, Alberta, but declined after that. He expects spending to once again rise in 2003. Shearing says projects in Quebec will drive this year's increase. For example, Shell Chemicals and Societe Generate de Financement du Quebec are building a 95,0 0 0 -metric-ton-per-year polytrimethylene terephthalate plant in Montreal slated for 2004 start-up. But it will be a while before there's another ethylene cracker built like the one inJoffre, says Smith, whose company now 20
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owns half of the cracker because of its purchase of Union Carbide. "In commodities, in the short to medium term, I don't see significant investments in Canada," he says. One reason the industry will have to wait for a new cracker is ethane. The Alberta gas is all tapped, and a new project will need additional natural gas from the Mackenzie Delta in northwestern Canada or Alaska—plus additional infrastructure in Alberta to extract the ethane from it. Moreover, Smith says there is overcapacity in ethylene derivatives in North America, and ethylene crackers are running at reduced rates. Nova's Henson says feedstock supplies can become tight for the plants that have already been built, in part because the Alliance Pipeline, finished in 2000, is taking ethane out of the country and into the mid-
TRADE Deficit widened again
NOTE: All data converted at exchange rate of $1.00 U.S. = $1,549 Canadian, a C&EN estimates. SOURCES: Statistics Canada. Industry Canada
western U.S. "It has had an impact on supply," he says. "Supply of raw materials versus demand was in balance in 2 002. As we move toward the cyclical peak, measures need to be taken to run the Joffre facility at full capacity" Nova is doing just that. This month, the company will complete a unit injoffre that will extract ethane from the natural gas that is used as fuel at the plant. The unit will produce up to 8,000 barrels of ethane per day Henson says Nova is also looking at the tar sands in northern Alberta. This is a tract of hundreds of square miles where tar sands are mined and later processed into synthetic crude and other hydrocarbon products. The sands can yield ethane, ethylene, propane, and propylene:, and Henson hopes they can be developed for these feedstocks in three to five years. Another issue affecting investment in Canada, according to Griffiths, is how the Kyoto protocol, which the U.S. didn't sign, will affect the chemical industry in Canada. "That puts another degree of uncertainty about where you are going to invest," he says. "Uncertainty is against you, and that is just one more degree of uncertainty that we have that some other parts of the world don't have." For the long term, the Canadian chemical industry is looking at ways to be less reliant on petrochemicals, and to that end it will examine the fine chemicals growth strategies of countries like Ireland. "The largest supplier of chemicals to the U.S. on a dollar basis is Ireland," CCPA's Shearing says. "We're second to Ireland now" Richard Paton, CCPAs president and CEO, has organized a discussion of Ireland when CCPA meets next year. CiWe are using Ireland as an example of what Canada could do ifwe refocused on the sector," Paton says. "There's absolutely no reason why we shouldn't capture some of that pharma chemical growth—given our regulatory structure and some of the other things that Canada has done over the years." DoVs Smith doesn't think it's a bad idea. "I think it is worth considering, but Ireland was developed over a long period of time," he says. "The advantage of Canada is the ease of access to the U.S. market, but you need to understand what the market demands are. It is a tough, competitive market now There is capacity ;around the world in many of these products, and it's tough to expand." Nevertheless, Paton says the Canadian industry is making all the right moves. "If we could just keep moving, we'll be in pretty good shape over the next couple of years," he says. • HTTP://WWW.CEN-ONLINE.ORG
COVER STORY liteno and in Copesul, Brazil's second largest ethylene cracker. Braskem is the fifth largest privately held company in Brazil and the largest chemical company in South America. It is said to have regional market shares of 51% in polyvinyl chloride, 39% in polypropylene, and 31% in polyethylene. ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU Thefirm'sinitialfinancialresults show N 2 0 0 2 , LATIN AMERICA WASN T ABLE ment of current political, economic, and some promising signs. Sales for the first nine months of 2002 increased 15%, on a to escape its decades-old pattern of financial market uncertainties." sporadic development punctuated by For example, chemical industry reaction pro forma basis, to $1.26 billion, and earneconomic and political turmoil. But to Brazil's new president is mixed. His past ings before interest, taxes, depreciation, even in this environment of uncer- as a labor leader isn't encouraging, but his and amortization during the period grew 16% to $237 million. During this tainty the region's chemical industry stayed pledge of financial moderation time, ethylene output decreased on its feet and made important strides. and increased exports is. Moreby 12% to about 710,000 metArgentina, hampered by three consec- over, industry observers believe ric tons, but mostly because the utive years of recession, took a turn for the that his domestic poverty and exCopene complex was idle during worse in 2002. In an effort to spur growth, port initiatives will lead to greater the second quarter for equipthe government abandoned the one-to- thermoplastics consumption. ment upgrades. Polyethylene and one dollar-to-peso peg that stabilized inBrazil's chemical sector took PVC output each increased by flation, causing the value of the peso to a big step through the formation WORLD 2 % - t o 494,000 and 298,000 plunge to more than three to the dollar by of Braskem last August. The CHEMICAL metric tons, respectively the end of the year. In November, the coun- company is the result of the purOUTLOOK try defaulted on World Bank loans. Gross chase by Brazilian industrial But Braskem has $2 billion in domestic product there declined by 16% conglomerates Odebrecht and debt and was hit hard by the in 2002, according to the International Mariani of a controlling interest in Co- real's devaluation. The company generatMonetary Fund. pene—the largest ethylene complex in ed net losses of $472 million during the first nine months of 2002, which it atThe Brazilian economy was able to Brazil—from Brazil's central bank. tributes to $749 million in losses owing to weather the spillover from Argentina, but it also saw a currency devaluation. Uncer- IN ADDITION to the Copene ethylene the falling exchange rate. In a recent presentation to shareholders, tainty in international financial markets complex in Camacari, Braskem includes over the election of leftist Luiz Inacio Lu- vinyls maker Trikem, polyolefins maker Braskem Chief Executive OfficerJose Carla da Silva as president caused financial OPP, ultra-high-molecular-weight poly- los Grubisich pointed out the company's uncertainty that eroded the real's value ethylene maker Polialden, and caprolac- strong cash flows and market outlook. "Our against the dollar by nearly 70% during the tam producer Nitrocarbono. Plus, Bras- expectationfor2003 and beyond is that the year. Nevertheless, Brazil's GDP managed kem has stakes in polyethylene maker Po- petrochemical industry will go into a recovery" he said. "We are confident that to grow 1.5%. we can improve ourperformance and Venezuela's problems are politiwe will be able to reduce debt." cal. In an effort to force its presi- PRODUCTION Another major development in dent, Hugo Chavez, from power or Brazil outpaced other Latin nations in 2002 Brazil has been the Rio Polimeros make him agree to an election, work- THOUSANDS OF project near Rio de Janeiro, a ARGENTINA BRAZIL MEXICO VENEZUELA ers at state oil company PDVSA METRIC TONS 707 414 732 957 515,000-metric-ton-per-year ethcalled a strike in December that has Ammonia Benzene 94 98 101 786 ane-based ethylene cracker that will crippled the country's oil industry 334 104 246 999 feed Unipol-technology polyethylGlobal oil prices surged. IMF is pro- Chlorine 1,063 454 612 2,462 ene plants. The complex—which is jecting that Venezuela's GDP will Ethylene 307 Ethylene oxide 96 na 278 to be owned by industrial groups have declined by 6.2% in 2002. Suzano (333%) andUnipar (333%) Mexico and Chile, the two growth Formaldehyde 107 26 na 279 as well as Brazilian state oil comstories in the region, are expected to Polyethylene3 730 340 479 1,725 pany Petrobras (16.7%) and Brazilcome in with 2002 expansion rates Polyethylene 482 na 334 terephthalate 143 ian development bank BNDES of 1.5% and 2.2%, respectively 212 77 248 832 (16.7%)—is expected to come onFor 2003, IMF expects Brazil, Polypropylene 13 356 na 65 239 streamin2005. Argentina, Mexico, Venezuela, and Polystyrene In addition to the Rio Polimeros Chile to grow modestly "The im- Polyvinyl chloride 464 133 150 538 stake, Petrobras also agreed to purprovement in global growth should Propylene 285 119 283 1,340 chase a 59% stake in Argentina's provide some support for regional Sodium hydroxide 374 280 1,064 117 Perez Companc (Pecom) in Octoactivity over the coming year," the Styrene 124 na 95 403 152 167 389 98 ber. Pecom controls Brazilian polybanking agency says. "But short- Toluene 371 988 na 936 styrene maker Innova, which makes term risks still appear to be pre- Urea ethylbenzene, styrene, and polydominantly on the downside, and na = not available, a Includes high-, low-, and linear low-density styrene. Pecom also has a 40% stake any turnaround in prospects will be polyethylene, b Includes general-purpose and high-impact polystyrene. SOURCE: Asociacion Petroqui'mica y Qufmica Latinoamericana in Argentine polypropylene proheavily contingent on the abate-
LATIN AMERICA
Chemical development progresses despite economic and political uncertainty
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COVER STORY ducer Petroquimica Cuyo and produces native. "This will change the Mexican prostyrene, polystyrene, and synthetic rubber duction profile and will help diversify the in Argentina. industry in the future," she says. In Mexico, 2 0 0 2 saw state oil company Pemex make an unpreceGDP dented pledge to modernize its opArgentina saw a massive contraction erations to finally enable petrochemical development there. As part i of a new $1 billion expansion proArgentina m gram, the company is completing s two 100,000-metric-ton ethylene Brazil expansions, at its Morelos and Cangas grejera complexes. The company says Chile this capacity will help feed a roughi ly 3 0 0,0 0 0 -metric-ton Unipol polyMexico m 2000 M 2001 ethylene plant planned for Morelos • 2002 ^s in 2005. Longer term, it is planning Venezuela W 2003 two ethylene joint ventures. -20 -10 0 Rina Quijada, a Latin American % change from previous year petrochemical consultant with SOURCE: International Monetary Fund Coral Gables, Fla.-based Intellichem, doesn't expect the ethylene complex to be built until 2007. She says The future of Venezuela's chemical inthat Pemex is also working to resolve the dustry is becoming more uncertain. PDVSA key issue of price formulas for long-term has been studying two petrochemical projfeedstock contracts. She notes that this efects. One is an ethylene joint venture with fort is not limited to natural gas, and MexExxonMobil inJose. The cracker—which is ico is now looking at naphtha as an alterslated to make 1 million metric tons of eth-
ylene as well as polyethylene and ethylene glycol—received government approval before the strike, PDVSAofficials say Another project is a 500,000-metric-ton styrene plant with Chevron Phillips. Quijada doubts anything will move forward in'Venezuelauntil the political climate improves. In fact, she points out that the country has not seen much foreign investment since 1999. But, she concedes, the partners have seen worse environments. "ExxonMobil is used to investing in countries that are high risk—like the Middle East; you don't get riskier than that." Moreover, she predicts that when Venezuela gets past its problems, its rich oil re10 sources will enable it to compete with the Middle East, which has been getting the bulk of petrochemical investment in recent years. The Latin American chemical industry spent 2002 making gains in an uncertain climate. If indications are correct that 2003 will be a better year for the region, then the industry should make still more improvements. •
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C & E N / J A N U A R Y 13, 2003
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COVER STORY
EUROPE European industry puts dispiriting year behind it and looks with cautious optimism to recovery PATRICIA L. SHORT, C&EN LONDON
L
observed at the November conference that "the recovery that worked for two or three quarters is running out of steam. Early indicators {for the final 2002 results}give us a grim message showing a sidestep or even a decline expected for the last four months." CEFIC's base-case scenario predicts, according to Gronych, a fragile recovery and assumes no war. He also presented a second scenario, however, that factored in a U.S. military strike against Iraq in 2003An Iraq attack—to which the CEFIC task force assigns a probability of 30%— would cause a drop of two percentage points in EU chemical production, they figure, to 1.0% over 2002. And chemicals growth in the US. would reach only 1.3% instead of 4.0%, as forecast in the base case for 2003. In fact, the CEFIC task force predicts that military action could cause a
IKE RECOVERING FROM A NASTY • Pharmaceutical prospects are good case of the flu, European chembecause ofproduct innovations and, hence, ical producers are slowly recovcompetitive advantages. ering from the last bits of a disAn improvement in the fortunes of the appointing 2002. The word that chemical industry is expected more widely springs to mind is "dispiriting": only halfthan just in Europe, of course. As CEFIC hearted, tenuous recovery after the dire economists see the coming year, world year preceding it. The result is chemical output will grow faster that the industry is glad to put than in 2002. CEFIC predicts 2002 behind it, as it looks with that global output will rise by cautious optimism toward a 3.9% this year compared with fragile recovery this year. 2.7% last year. Breaking that down, however, if Europe stabiIt's not that 2002 was a catalizes at 3.0%, clearly the imstrophic year. As economists at FIBERS provements in chemicals output the European Chemical IndusUp, down, and no change in 2002 WORLD will come from the US. andjapan, try Council (CEFIC) pointed CHEMICAL both recovering from low or negout at its annual trade and ecoBillions of lb OUTLOOK 2.2 ative figures in 2002, and from nomic conference in Brussels in v < ., ••, . x 2.0 Asia—in China, in particular— November, the chemical indusPolyester where the strongest growth is expected. try in the European Union "experienced 1.8 Acrylic modest growth in 2 0 0 2 after a difficult There are still potential problems ahead. 1.6 2001." But more important, improvement Other economists in Europe join their coli— „ ^ ^ ^ ^ ^ 4,, 1.4 ». is expected this year, CEFIC economists N^ ^ ^^v^V leagues at CEFIC in pointing out the un1.2 said at the conference. Polyamide^^ certainties regarding a possible war in Iraq, i i i i i i i i i 1.0 In 2003, European Union chemical outfor one. 1992 93 94 95 96 97 98 99 00 01 02a put, excluding pharmaceuticals, is forecast a Estimates based on ten months' data. For example, Ralf Gronych, senior econSOURCE: CIRFS (International Rayon & Synthetic to grow by 2.4%, up from a rate of 2.1% in omist with BASF and chairman of the Fibers Committee) 2 0 0 2 . Total output, including pharmaCEFIC Economic Outlook Task Force, ceuticals, is expected to grow by 3.0% this year. That's the same aggregate rate, howBASICS ever, that is expected for 2002 when the European economies set for modest recovery in 2003 . final statistics come through. The implication is that there will be a resurgence in % annual change for European Union k ~Real gross domestic product " chemicals per se, but a slight tapering of Consumer prices pharmaceuticals output. Wk S5i >According to the association's forecasts for 2003, among developments expected for the various sectors—couched in general - - - - - - - - - - \ terms because of the difficulties in reconciling predictions from all the countries 1993 94 95 96 97 98 99 00 01 02a 03a 1993 94 95 96 97 98 99 00 01 02a 03a making up CEFIC—are the following: • Petrochemical production will fall ... with most consumer prices on the decline in major countries back below average in 2003 after surpris% annual change ingly strong growth in 2002. i Real gross domestic product • Consumer prices • Plastics and synthetic rubber will get a boost from the higher pace in general industrial activity • Production of inorganics will be considerably below average. • Specialties and consumer chemicals 0 __J a a are expected to perform in line with the 2001 02a 03a 2001 02a 03a 2001 02a 03a 2001 02a 03; 2001 02 03 average. Netherlands Belgium France Germany Italy • Man-made fibers are expected to fall a Estimates. SOURCE: Organization for Economic Cooperation & Development steeply
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COVER STORY decline in global chemicals growth to 1.5% over 2002 instead of nearly 4.0% growth in the base case. The main arguments for optimism in the base case include strong expansionary impulses in the U.S., a reduction in bank interest rates by the European Central Bank, and oil prices tending downward toward a price range of $22 to $24 per barrel at the end of 2003. "Our base-case forecast assumes only a temporary fragile phase of demand retrenchment lasting until the first quarter of2003, but we forecast no lively rebound, especially in Europe," Gronych said. "Overall manufacturing in Europe remains mired in recession, and nearly every traditional customer industry for chemicals
economists predicted for the remainder of 2002. Rather, the boost came mainly from inventory restocking of basic chemicals, as industrial customers prepared for a positive demand swing. However, Gronych noted, "pre-September data already show a slowing down in production." These data, he added, "lead us to estimate a soft slowdown in third- and fourthquarter production after the exceptionally lively first-half 2002, more in line with weak industrial activity For the full-year 2002, the figure will be above our earlier expectations, where we had forecast a very soft development." A mixture of factors will influence the European chemical industry in the coming year, Gronych said. "We foresee in 2003
land. The industry will, however, see agradual slowdown to 6% this year. In the core chemical business, excluding pharmaceuticals, the growth rates are lower: CEFIC estimates production growth of 2.1% in 2 0 0 2 , although that was an improvement from a 0.5% decline in 2001. For 2003, CEFIC predicts growth of 2.4%, nearly in line with industrial production growth. The prospects for France, the U.K., and Italy are expected to be positive, and the Benelux countries of Belgium, the Netherlands, and Luxembourg are still clearly above the EU growth average. However, countries with a liigh portfolio in basic chemicals, such as Belgium and Germany, will have lower rates of growth than in 2002.
MONEY
CAPITAL SPENDING
Dollar tumbled through mid-2002 versus major European currencies
Slight pickup expected in 2003
Relative value of U.S. dollar versus European currencies, January 1999 = 100
% annual change 10
i;::: Euro3
H British pound B Swiss franc
5
A
/f
\
0
I
'8 o —
^ ^ ^ y . -5
z
-10 -15 1993 94 95 96 97 98 99 00 01 02a03 ) i
1999
2000
i
i
i
i
i
i
2001
i
i
i
i
2002
a The euro was adopted as common currency on Jan. 1, 1999, by 12 of the 15 countries in the European Union. SOURCES: U.S. Federal Reserve Bank, International Monetary Fund
was tending toward negative in 2002," he said. "We forecast a 1.5% decline in 2002, and only a moderate cyclical rebound to 2% in 2003, in line with growth in European gross domestic product." However, he added, that has positive implications for the outlook for the chemical industry which usually is one of the first industries to recover during an upswing. Indeed, confirms C. A. Linse, chairman of the Association of the Dutch Chemical Industry, "the chemical industry has withstood the difficult economic conditions more successfully than other sectors in the Netherlands." In the first eight months of 2002, the European chemical industry, including pharmaceuticals, experienced a solid production boost, in contrast to the U.S., CEFIC economists noted at the conference. The contribution from domestic demand was very limited at best—a trend the
some new momentum for production stemrning from a pickup in final industrial demand. But impetus from inventory restocking can no longer be expected as in 2002. Furthermore, overseas demand will be weaker as demand and production in the U.S. and Asia will affect EU exports." Moreover, he added, the task force expects "no sharp turnaround because of the weak stance of overall domestic demand." THE OUTLOOK also varies for the different sectors of the industry For example, the pharmaceuticals business—which accounts for about 26% of total chemical production value—has shown a different profile from the more traditional chemicals industry and that is expected to continue this year. "Even in 2002, pharmaceuticals production will be up by about 8% in Europe," Gronych said, led by production in Ire-
NOTE: Fixed investments. Data are for Western European countries, excluding Ireland, Portugal, Greece, and Switzerland, a Estimates. SOURCES: European Chemical Industry Council, C&EN estimates
Among the more intriguing prospects for 2 0 0 3 , however, is the slowdown in growth of the chemical industry in Ireland. Following nearly a decade of double-digit increases that reflected heavy investment in the Irish pharmaceuticals sector, Irish chemical production growth is expected to soften to the more mature rate of 7.4% this year, down from the 257% in 2001 and t h e 23.4% in 2 0 0 2 estimated by BASF's economics department. Germany which has the largest chemical industry in Europe, is still suffering from the effects of reunification in 1989, according to most economists. Its (chemical industry is expected to be an underperformer compared with the EU average, with only 1.5% growth this year. According to Wilhelm Simson, president of the German Chemical Industry Association (VCI), "Noteworthy growth in chemical output was recorded only in the first
"We foresee in 2003 some new momentum for production stemming from a pickup in final industrial demand/' 24
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quarter of2002, when many customers from the manufacturing industry were expecting an upswing and replenished their stocks. But the expected upswing failed to materialize, so demand for chemical products remained low in the further course of the year. "For 2 0 0 2 , we estimate an overall production increase by 2.5%," Simson continues. "Output of petrochemicals and their derivatives had been particularly hard hit by the economic decline, so that production figures dropped by 3.5% in 2001; for 2002, we estimate that the production went up by only 1.5%. Output of inorganic basic chemicals rose by 3.5%, and polymer production fell by 0.5%. Specialties and performance products declined in the course of the year, but compared with the dire 2001, showed an improvement of 1.0%. Output ofpharmaceuticals improved by 5.0%, and production of agrochemicals was up by 4.0%." The German chemical industry was optimistic enough in 2002, he notes, to have spent just over $7 billion in capital investment, up 2.0% from 2001. Investments abroad will be even higher than that, Simson adds, "because for many years foreign investments have been growing faster than investments in Germany: Our companies must be present where their customers are located." Predictions about the recovery even if fragile, in the health of the chemical industry are welcome to the entire region, argues Francois Cornells, chief executive officer of Atofina and CEFIC vice presi-
One of the factors that has kept the economic condition of the European 'Transition' countries' GDP set to continue chemical industry from descending instrong growth... to the "miserable" range, however, has been its continuing strong performance 1999 2000 2001 2002a 2003a in exports. 4.0% Bulgaria 2.3% 5.4% 4.0% 4.0% As Cornells noted, the chemical inCzech 3.5 Republic 2.5 0.5 3.3 3.3 dustry registered a trade surplus of Estonia 4.5 -0.6 7.1 4.0 5.0 roughly $65 billion in 2001. It will be 5.5 Hungary 4.2 4.0 5.2 3.8 difficult to estimate the future surplus 4.5 Latvia 2.8 4.0 6.8 7.7 since the competitive edge of the chem4.5 5.2 Lithuania -3.9 3.8 5.9 ical industry in Europe depends to a de3.0 Poland 4.1 4.0 1.0 1.0 gree on the position of the euro versus 4.0 Romania -3.2 3.5 1.8 5.3 the dollar—particularly as the dollar 4.1 3.8 Russia 5.4 8.3 4.9 weakened in mid-2002—and on the un4.0 3.5 Slovakia 1.9 2.2 3.3 4.0 Slovenia 5.2 4.6 3.0 2.7 certainty related to the future regulatory climate. ... powering growth in industrial output Nonetheless, exports are expected to maintain their strength for the in2001 2002a 2003a 1999 2000 dustry According to Gronych, trade of Bulgaria -12.5% 12.0% 0.7% 1.0% 2.5% Czech chemicals within Europe will expand 5.5 Republic -0.4 5.1 5.5 6.8 traditionally in proportion to general 5.0 Estonia -4.2 14.6 4.5 7.0 activity 6.0 Hungary 10.4 18.3 6.4 6.0 T h e major focus of the industry, Latvia 6.3 -5.7 4.4 6.0 8.8 however, is on extra-European trade, 10.0 Lithuania -11.2 12.5 5.3 16.9 dependent on overseas demand. The 4.4 7.1 1.6 Poland 1.2 -0.5 6.0 Romania -8.8 8.2 8.5 10.0a CEFIC task force expects a marked 5.5 Russia 8.1 5.0 9.0 5.9 slowdown in export growth to around 5.0 Slovakia 5.3 -3.4 9.1 4.6 2.3% and 4.2% in 2002 and 2003, re3.5 Slovenia -0.5 2.8 6.2 2.9 spectively In recent years, by contrast, a Forecasts. SOURCES: European Bank for Reconstruction the industry recorded an exceptionally & Development, United Nations Economic Commission for strong export expansion: Trade statisEurope, C&EN estimates tics in 2001, for example, showed nearly a 10% push in nominal terms. He pointed out that operating results In fact, the region's trade balance is exof chemical companies declined substanpected to increase to over $70 billion this tially in 2001 and were not expected to recover significantly in 2002. Profitability year, from roughly $66 billion expected in 2002. was affected, he said, by a variety of facMuch of the trade balance comes in extors, including high energy prices, manu-
ECONOMY
EMPLOYMENT
PETROCHEMICALS
Chemical industry holds its own
Olefin production sagged, except for propylene
Millions
Billions of lb 50 • Ethylene
Propylene 11 Butadiene
40 30 20 1993 94 95 96 97 98 99 00 01 02a03a a Estimates. SOURCES: European Chemical Industry Council, C&EN estimates
dent. As he observed when he opened the CEFIC economic conference: "Our industry is essential to Europe's well-being. It provides employment for 1.7 million people, it contributes more than $500 billion to Europe's gross domestic product, and it is a major contributor to the European trade balance." HTTP://WWW.CEN-ONLINE.ORG
10 0 1992
1993
1994 1995
1996 1997
1998 1999
2000
2001a
2002b
a Revised data, b Estimates based on nine months' data. SOURCE: Association of Petrochemicals Producers in Europe
facturing overcapacity following the large investments of the late 1990s, and slow economic growth. And the problems have not been felt solely by producers of basic chemicals. Cornells added, "The situation of some companies in the specialty and fine chemicals sector is even becoming precarious."
ports to the former East Bloc countries. And although the bookkeeping will have to be changed with the accession ofmany of these countries, particularly from Central Europe and the Baltic region, into the EU, the growth rate in these countries and the concomitant demand are expected to continue to support chemical production in Europe. C & E N / JANUARY 13, 2003
25
COVER STORY As Cornells said at the CEFIC conferfederation of Independent States—the ence, 'We look forward to the enlargement former Soviet Union countries. of the European Union to the East, creatAdds the report: "There is reason to being a home market of 450 million people. lieve that the trends observed over the past EU membership will certainly stimulate three years are sustainable. The leveling of growth and investments in those countries." the playing field that seems to have taken According to Willem H. Buiter, chief place across the region suggests that the economist of the London-based European forces of economic and political competiBank for Reconstruction & Development tion may provide an impetus for progress (EBRD), the improved economic perin reform and better governance." formance has been good enough to spur strong growth of foreign direct PRODUCTION investment into the region. The reMixed recovery pattern seen for 2003 gion has claimed an increased share of the global foreign direct investBelgium ment pot—which fell in 2 0 0 2 by about 40%—and an increased toDenmark tal, to $31 billion for the 27 counFinland tries that EBRD shepherds. France
HOWEVER, he adds, this investGermany ment is highly concentrated in the advanced accession countries — Italy those set to join the EU in 2004. Netherlands "Outside those countries, foreign direct investment is overwhelmSpain ingly concentrated in the extractive sectors —oil, natural resources. Sweden There is still little foreign investSwitzerland ment going into manufacturing services of a nonextractive kind," U.K. Buiter says. 2 0 2 4 6 8 % change from previous year "We are certainly seeing more a Estimates. SOURCES: European Chemical Industry Council, BASF flows of direct investment into the estimates accession countries," says David Walton, chief European economist for investment bank Goldman Sachs, and During 2001 and the first half of 2002, that investment money will have a sizable the transition economies continued to perimpact. The absolute amounts of investform well relative to other regions of the ment money may not be large for the Westworld. Growth was steady inflation fell, ern European countries, but they will be and capital inflows increased. Overall very big for the accession countries. growth for the 27 EBRD countries held during the troubled year of 2001 at 4.2%, "For those German companies that are down from 5.5% in 2000. Developments able to choose sites for their production, in the first half of 2002 suggest that growth it will be quite a big opportunity We have for that year is likely to be about 3.4%. seen it with the car companies—for example, General Motors investing in Poland Agreeing with that assessment is the rather than Germany—but there is scope Economic Survey of Europe, 2002, pubfor others as well," Walton says. lished in November by the Geneva-based "Over the past three years, the transition United Nations Economic Commission economies have achieved solid economic for Europe (UNECE). growth and progress in economic reform," "Despite the unfavorable external consays the latest Transition Report of EBRD, ditions, most economies in the region manwhich was established to help the econaged to preserve some of their dynamism omies of the former East Bloc make the during the first half of 2 0 0 2 , although transition to capitalism. there was a general moderation of the pace "Moreover, there is clear evidence that ofgrowth," said Brigita Schmognerova, exthe less advanced transition economies are ecutive secretary of UNECE. starting to catch up with the front-runShe pointed out that one of the factors ners," the report adds. contributing to the strong growth of the reT h e business environment has imgion— the shift: toward domestically drivproved significantly across the region, paren growth and away from export-led ticularly in Southeast Europe and the Congrowth, which had begun in 2 0 0 1 and 26
C & E N / J A N U A R Y 13, 2003
strengthened in the first half of 2002— opens a point of vulnerability: "It is unlikely that these economies will be able to escape for long the negative effects of a protracted weakness in the global and^ftfest European economies." "My crystal ball tells me that this is a long-term business, so that whatever the short-term issues are, we have to be strong for the long term," stresses James Smith, a member of the executive committee of Shell Chemicals. "The fourth quarter of 2 0 0 2 although people are concerned— actually looks better than last year. Our concerns are not profound," Smith says. "The resumption in the macroeconomy was slighdy delayed, but it is beginning to pick up as the year winds down. 'Also," he adds, "we have to remind ourselves: The economic dip was really a dip, not a deep recession. It was not as severe as we had expected. So against a limited dip, we can't expect a sharp recovery The industry is properly optimistic about things—we are resilient to things taking a bit longer than originally expected." Moreover, he argues, the industry is on anup-cycle of macroeconomic 10 growth in the medium term, which gives it a rare opportunity to break its historic cycle of overcapacity and poor prices. "There is not: too much excess capacity and not too much will be coming onstream in the next fewyears." However, he notes, the European industry will have to be sharp in mamtaining its competitiveness, as more players continue to emerge. As Atofina's Cornells puts it:: "Half of industrial growth is linked to investment in research and development and in new, innovative companies. Recent analysis has demonstrated the direct link between increase in domestic research and employment. Innovation is also driven by the daily application work of the many hundreds of small and medium-sized comp >anies that constitute the industrial fabric of Europe. In order to support their long-term effort, we need to focus on education, on financing, and on regulations." As Smith adds, underpinning the industry "is the quality ofthe producing assets we have, the technology we can employ and the talent of our people. Competition is about deploying people better than your competitors. There will be challenges in the coming year, of course, but it will be an exciting industry" • HTTP://WWW.CEN-ONLINE.ORG
COVER STORY ment in profit in the year ending March 31,2003, as a result of strong sales of electronic materials and cost-cutting measures. Japanese chemical companies are making progress in their restructuring efforts. Mitsubishi Chemical is rapidly shedding businesses in which it has no competitive advantage and has refocused the efforts JEAN-FRANCOIS TREMBLAY, C&EN HONG KONG of its researchers to better prepare for the future. Major companies such as Asahi are weak. Although Japanese production of AST YEAR BROUGHT A STEADY DiKasei, Showa Denko, and Teijin are all most chemicals was down in 2002 for the et of dismal reports from Asia. implementing more radical plans that emsecond year in a row, the country's chemiTerrorists killed tourists in Bali. phasize cost control and increased busical trade surplus widened. A fewJapanese Communal violence erupted in ness focus. chemical companies reported Gujarat. T h e Bank of Japan T h e rise of China has bemassive losses in the fiscal year bought shares from Japanese banks as it come more of an opportunity that ended March 31,2002. For ran out of options in its efforts to mainthan a threat to Japan's chemiexample, Mitsubishi Chemical tain stability: Hong Kong reported record cal industry Since China joined lost nearly $ 4 0 0 million, and rates of unemployment. the World Trade Organization, Showa Denko lost almost $300 But the economies in the region fared Japanese chemical companies million. Six months later, howbetter than was feared last January, even are more willing to invest in the ever, both companies reported though growth was very uneven. China's WORLD country In a recently unveiled net profits. economy is booming whileJapan's is strugCHEMICAL package of new management gling. Taking Asia as a whole, better-thanOUTLOOK policies, Mitsubishi Chemical expected growth in 2002 has set the stage MOST OTHER Japanese chemisaid it would actively seek out for another reasonably good year. The cal companies reported iminvestment projects in basic chemicals in Asian Development Bank (ADB) expects proved profits before extraordinary items China. In December, Mitsubishi Rayon Asia's gross domestic product (GDP) to for the first half, which ended Sept. 30, announced three Chinese investment grow 5.6% this year, the same as last year, 2002. Profits at Shin-Etsu Chemical conprojects worth a total of more than $100 even though the region is reported to be in tinued to increase, as they have for the past million. a slump. 10 years. Mitsui Chemicals expects to The three petrochemical complexes The dynamism of China's economy is quadruple net income thisfiscalyear. Sumbeing built in China by BASF, Shell, and one of the main reasons for Asia's good itomo Chemical expects a 16% improveBP in joint ventures with Sinopec overall performance. China is roarand China National Offshore Oil ing, with estimated G D P growth of 8.0% in 2 0 0 2 and 7.2% this year. GDP ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ Corp. are benefitingJapanese engineering firms. J G C Corp. won One year ago, ADB expected China Economies strengthened in 2002, except in Japan the $500 million tender to build to grow7% in2002 and 7% in2003. the S h e l l - C N O O C cracker in ButJapan also contributed to the reChina Guangdong province as well as an gion's growth by continuing to mud• ethylene oxide/ethylene glycol dle along instead of delivering a longHong Kong plant at the BASF-Sinopec comdreaded collapse. B2000 India plex in Nanjing. Chiyoda led a ADB has been raising its ecoIS 2001 consortium that earned the $300 nomic forecasts for nearly every B20023 Indonesia B2003a million contract to build a styAsian country "Since the first quar•a rene/propylene oxide unit at the ter of 2002, ADB's projections for Japan • Nanjing complex. AndToyo En• developing Asia and the Pacific have gineering will build the acrylic been regularly raised as the outlook Malaysia acid, acrylic ester, and oxo alcohol appeared better than earlier exunits for the same project. Pakistan pected, particularly with regard to exports," explains Ifzal Ali, the Philippines INDIA IS ALSO doing better than bank's chief economist. H e adds appears at first glance. Although that consumption grew particular• • • Singapore there was violence between the ly strongly in China, South Korea, Muslim minority and Hindus in Indonesia, Malaysia, and Thailand. South Korea r Gujarat, the Indian economy held Spending programs by regional govits own, even if it performed ernments and easy money policies Taiwan slightly below expectations. ADB by central banks helped economies ™" • • • Thailand estimates that India's G D P grew grow. 5.0% in 2002, slightly lower than The regional chemical industry is 15 o 5 10 the 5.5% it forecast one year ago. % change in gross domestic product doing reasonably well and will likely from previous year But this slower growth is strong have a fairly good 2003. There are a Estimates. SOURCES: Asian Development Bank, Organization for compared with most other counsome encouraging signs in Japan, Economic Cooperation & Development tries. India's dominant p e t r o even though most of the numbers
ASIA-PACIFIC
Despite depressing headlines, the region's outlook is favorable, with China as the driver
L
U,.,l---.:-
~c*
HTTP://WWW.CEN-ONLINE.ORG
C & E N / J A N U A R Y 13, 2003
27
COVER STORY chemical producer, Reliance Industries, reported a 25% increase in net profits, compared with a year ago, for the quarter ending Sept. 30, 2 0 0 2 . For the six months up to the end of September, the company's Jamnagar oil refinery, one of the world's largest, operated at 110% of projected capacity South Korea's chemical industry enjoyed agoodyear in 2002. Production of chemicals had remained more or less stable between 2000 and 2001. But last year, production grew strongly—by as much as 27% in the case of acrylonitrile-butadiene-styrene. LG Chem reported a 75% improvement in net profits in the quarter ending Sept. 30. LG Chem revised its full-year profit forecast upward. Taiwan's economy rebounded last year and likely will continue to do well this year. The island's chemical industry had an auspicious 2 0 0 2 . Production of chemicals grew by 10% overall, and profitability was good. Formosa Plastics Corp., the island's leading maker of polyvinyl chloride, expected to improve its pretax profit for 2002 by 43%. The company said that it expects its income to increase by 10 to 2 0 % in 2003. The Singapore economy grew by only 2 % or so last year, but the Singapore chemical industry did well. FromJanuary
TAIWAN Chemical production showed strong growth 1998
1999
2000
2001
2002a
CHANGE 2001-02
All manufacturing Chemicals Basic chemicals Petrochemicals Fertilizers Synthetic fibers Plastics & resins Synthetic rubber
111.3 109.1 102.5 105.7 98.4 1U.9 108.8 1U.6
120.3 119.0 111.3 124.2 90.2 116.6 120.2 135.7
129.9 127.2 126.5 137.3 86.9 120.3 125.4 128.1
119.5 134.6 123.5 168.8 81.3 114.8 125.3 131.1
130.8 148.3 143.2 196.0 85.3 116.6 135.1 156.9
9.4% 10.2 15.9 16.1 4.9 1.5 7.9 19.7
Chemical products Paints & varnishes Drugs & medicines Pesticides & herbicides Rubber products Plastic products
107.0 103.8 109.7 104.3 96.4 97.5
112.2 103.4 115.0 109.3 94.8 103.4
116.3 101.7 119.0 112.2 92.9 101.9
105.7 86.5 118.3 102.4 82.8 92.1
111.2 96.2 123.5 91.7 92.3 98.4
INDUSTRIAL PRODUCTION INDEX, 1996 = 100
a C&EN estimates. SOURCE: Taiwan Ministry of Economic Affairs
pore Economic Development Board (EDB). Output of pharmaceuticals grew by 7.7%. However, Singapore is not very optimistic about this year. EDB reports that the business outlook for the October 2002-March 2003 period is much weaker than it was earlier in 2002. The Singapore specialty chemicals industry expects weak demand for its products primarily
JAPAN Automobile production saw increase...
... but housing starts continued to weaken
Millions of units 10 |
Millions of units
_j—i
i
i
i
i
i
i
1992 93 94 95 96 97 98 99 00 01 02a
1.0
1992 93 94 95 96 97 98 99 00 01 02a
a C&EN estimates. SOURCE: Japan Ministry of Trade & Industry
to October, petrochemical output grew by more than 2 2 % compared with the year-earlier period. Production of industrial and specialty chemicals grew 9%. At only 3 million people, Singapore's population is small; most chemicals made there are exported. The growth in 2 0 0 2 was to meet more orders from China, Southeast Asia, and Korea, according to the Singa-
5.2 11.1 4.4 -10.5 11.5 6.8
because the semiconductor industry will take longer than expected to recover. In the petrochemicals sector, however, pricing is expected to remain stable. The outlook for petrochemicals in Asia as a whole actually is not bad for the next year or two. Whereas numerous p e t r o c h e m i c a l plants came on-line worldwide in 2001 and 2 0 0 2 , the pace
of capacity additions will be slower in 2003. This will allow demand to catch up with supply, to the benefit of profit margins. DEMAND REMAINS strong in China. Sinopec reported that in the first six months of 2002, consumption of synthetic rubber, synthetic resins, and synthetic fibers grew 12.4%, 13.1%, and 19.4%, respectively, compared with the year-earlier period. The company expects demand to remain strong. "The chemical market in China is a market with enormous potential growth," Sinopec says. Ifet the relatively good economic story that is taking shape in Asia could take a negative turn quite easily Japan could deliver the financial meltdown that has been dreaded for so long. Delays in implementing additional reforms could cause China's economy to slow down. The deflation that prevails in several Asian countries could get worse. Oil prices could jump as a result of war in Iraq. Depending on which economist one believes, a full-blown financial crisis inJapan would either be cataclysmic or have less serious consequences than the crisis in Argentina last year. Kenneth Courtis, a vice chairman of investment bank Goldman Sachs, believes that a financial crisis in Japan would be a world economic disaster akin to the crisis of the 1930s. Much like Courtis, Adam S. Posen, a senior fellow at the Washington, D C -
The relatively good economic story that is taking shape in Asia could take a negative turn quite easily. 28
C & E N / J A N U A R Y 13, 2003
HTTP://WWW.CEN-ONLINE.ORG
JAPAN
JAPAN
Production of chemicals was mostly down
Chemical trade surplus grew $ Billions
THOUSANDS OF METRIC TONS UNLESS OTHERWISE INDICATED INORGANIC CHEMICALS Ammonia Ammonium sulfate15 Carbon black Chlorine, liquid
2002 a
CHANGE 2001-02
1998
1999
2000
2001
1,689 1,618
1,685 1,716
1,715 1,749
1,604 1,585
1,455 1,560
723 881
761 875
788 847
742 777
747 743
Hydrochloric acid Hydrogen peroxide Nitrogen 0 Oxygen 0
2,408
2,448
2,494
2,342
2,267
140
145
151
159
158
-3.2 -0.6
9,716 9,188
9,855 9,534
10,290 10,655
10,296 10,373
10,373 10,558
0.7 1.8
Sodium hydroxide Sodium silicate Sulfuric acid Titanium dioxide
4,252
4,345
4,471
4,291
4,187
765
769
720
679
605
-2.4 -10.9
6,739
6,943
7,059
6,727
6,745
0.3
251
269
270
257
241
-6.2
414 654 459 667
415 644 507 738
401 675 508 732
372 594 476 738
371 542 465 696
-0.3 -8.8 -2.3 -5.7
4,203
4,459 1,035
4,425 1,044
4,261
4,219
495 581
461 599
976 472 531
956 450 495
-1.0 -2.0 -4.7 -6.8
-9.3% -1.6
0.7 -4.4 1992 93 94 95 96 97 98 99 00 01 02a
ORGANIC CHEMICALS Acetaldehyde Acetic acid Acetone Acrylonitrile Benzene d Butadiene Butanol Caprolactam
977 424 519 652
688
673
598
597
7,076 3,491
7,687 3,503
7,614 3,431
7,361 3,275
7,039 3,325
920
922
930
787
704
-10.5
Ethylene oxide Octanol Phenol Phthalate plasticizers
953 285 851 398
976 315 888 417
990 278 916 396
891 262 884 369
838 290 874 363
-5.9 10.7 -1.1 -1.6
Phthalic anhydride Polypropylene glycol Propylene Purified terephthalic acid
301 274
301 302
290 304
259 294
260 289
5,101 1,616
5,520 1,547
5,453 1,527
5,342 1,496
5,158 1,643
2,770 1,349
3,055 1,488
2,968 1,489
3,004 1,423
2,992 1,508
192
192
214
214
217
4,340 2,754
4,641 2,969
4,681 2,920
4,798 2,814
4,846 2,880
6.0 1.4 1.0 2.3
Cyclohexane Ethylene Ethylene dichloride Ethylene glycol
Styrene Toluene d Toluene diisocyanate Xylene d p-Xylene
-0.2 -4.4
1.5
0.4 -1.7 -3.4
9.8 -0.4
based Institute for International Economics, believes that ajapanese financial meltdown would cause a sharp drop in the value of the yen, extreme volatility in financial markets, flight of capital away from Asia, and depreciation of most currencies in Asia. But he expects the impact on the U.S. would mostly consist of $30 billion in losses at American banks and demands for protection against unfair foreign competition by the U.S. steel, automotive, and electronics industries. Posen expects the crisis inJapan to take place in 2005 at the latest. THE JAPANESE ECONOMY is suffering from deflation. Consumer prices have been dropping about 1% peryear since 2000, according to the Organization for Economic Cooperation & Development (OECD). Companies deal with deflation by cutting costs, which often entails reductions in employment and salaries. Because they earn less money from jobs or expect to earn less in the future, consumers buy less or look for cheaper goods, which encourages further deflation. Japan is not alone in going through this process. In a recent report, ADB claims
SOUTH KOREA
PLASTICS Phenolic resins Polycarbonate Polyethylene Polyethylene, high density
259 317
250 351
262 354
232 370
236 375
1.7 1.4
3,143 1,168
3,369 1,301
3,342 1,246
3,294 1,240
3,148 1,168
-4.4 -5.8
Polyethylene, low density Polyethylene terephthalate Polypropylene Polystyrene Polyvinyl chloride
1,760 1,300 2,520 1,975 2,457
1,856 1,281 2,626 2,037 2,460
1,892 1,308 2,721 2,024 2,410
1,852 1,243 2,696 1,810 2,195
1,773 1,203 2,591 1,821 2,170
-4.3 -3.2 -3.9
SYNTHETIC RUBBER
1,520
1,577
1,590
1,466
1,476
0.7
0.6 -1.1
a C&EN estimates, b Agricultural and nonagricultural use. c Millions of cubic meters, d Petroleum and nonpetroleum sources. SOURCE: Japan Ministry of Economy, Trade & Industry
HTTP://WWW.CEN-ONLINE.ORG
NOTE: Excludes rubber and photographic material, a C&EN estimates. SOURCE: Japan Chemical Exporters & Importers Association
Petrochemical exports Showed healthy growth $ Billions 10
Exports jr-***
^^0^ i i 0 1992 93 U
v ^ | m p 0r ts i
i
i
i
i
i
i
95 96 97 98 99 00 01 02a
a C&EN estimates. SOURCE: Korea Petrochemical Industry Association
C & E N / J A N U A R Y 13, 2003
29
1)0 that China is exporting deflation to the rest of the world. T h e flip side of the surge of investment China enjoyed in recent years is a surge in its manufacturing capacity More and more manufactured goods sold worldwide are made in China. China's enduring abundance of cheap labor and the excessive expansion of manufacturing capacity mean that products made there reach foreign markets at prices cheaper than ever. Those competing against Chinese products must cut salaries and employment in order to meet Chinese costs. China's economy, which is increasingly acting as the region's growth engine, will slow down next year, according to ADB. But it could become worse than a
ties. The organization further advocates curtailing barriers to trade between regions in China and reducing government p r o t e c t i o n of s t a t e owned companies. A war in Iraq would affect growth in Asia. ADB's Ali says a conflict there would raise oil prices either by a moderate $5 to $10 per barrel or by a m u c h more considerable $20 per bbl. Under the first scenario, G D P growth in the U.S. will be lower by 0.6% to about 2%, and that in turn will cause lower growth of 0.2 to 0.8% in Asian countries. If oil prices rise by more than $20 per bbl, the ripple effect will be a lowering of growth in Asian countries by 1 to 2%. Any number of catastrophes could take place. But all in all, the year is starting out
"The chemical market in China is a market with enormous potential growth."
one,step ,
ahead
^our research.
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SOUTH KOREA Output of chemicals showed strong recovery THOUSANDS OF METRIC TONS INORGANIC CHEMICALS Carbon black Sodium hydroxide
1998
1999
Once an article has been peer2000
2001
2002a
CHANGE 2001-02 11.2%
384
438
455
420
467
1,069
1,163
1,203
1,300
1,309
0.7
reviewed and is posted to the Web, you'll be the first to know and in some cases, weeks before the article appears in print. You choose to receive weekly or daily alerts from your favorite
ORGANIC CHEMICALS Acrylonitrile Benzene Butadiene Ethylene Propylene Vinyl chloride PLASTICS Acrylonitrile-butadiene-styrene Polyethylene, high density Polyethylene, low density Polypropylene Polystyrene Polyvinyl chloride FORMULATED PRODUCTS Composite fertilizers Paint Synthetic detergents
358
372
382
340
363
2,412
2,572
2,834
2,730
2,810
6.8 2.9 4.9 4.5 5.9 2.3
731
764
808
778
816
5,110 3,247
984
5,216 3,282 1,017
5,439 3,409 1,133
5,380 3,283 1,355
5,624 3,477 1,386
636
784
111
815
1,615 1,518 2,355 1,038 1,013
1,756 1,642 2,440 1,105 1,170
1,706 1,576 2,413 1,154 1,191
1,830 1,603 2,430 1,180 1,254
1,037 1,928 1,606 2,553 1,361 1,238
15.3 -1.3
1,993
1,944
2,117
2,165
2,283
5.5
277 327
333 379
356 412
370 415
359 442
-3.0
27.2
5.4 0.2 5.1
slowdown if the Chinese government does not implement some difficult reforms. Banks in China are carrying an increasing number of nonperforming loans, limiting their ability to lend to the small and medium-sized companies that energize the economy. O E C D says the government will have to turn banks into profit-seeking entiC&EN
/ JANUARY
13, 2003
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6.5
a C&EN estimates. SOURCE: National Statistical Office, Republic of Korea
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well for the region's chemical industry. Japan still struggles, but China and India both continue to enjoy strong growth. After about seven years of low profitability, the petrochemical industry looks set to enjoy a fairly good year. If the Japanese economy does not crash and if there is no major conflict in Iraq, 2003 will be a good year. •
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