Where is the chemical industry going?

Business Economics, Oct, 1999 by T. Kevin Swift

THE FUTURE WILL SEE GLOBALIZATION, CONSOLIDATION AND TECHNOLOGICAL CHANGE

Dating from 1635, the business of chemistry (a.k.a. the chemical industry) is one of the oldest U.S. industries. It is a dynamic, forward-looking high-tech industry, a keystone of our economy and a leader in protecting the environment. Although the public does not always appreciate the many benefits arising from chemistry, its products greatly enhance our quality of life. Included are more than 70,000 products that enable rising U.S. productivity and living standards. Synthetic fibers and permanent-press clothing, life-saying medicines, health improvement products, more protective packaging materials, longer lasting paints, stronger adhesives, more durable and safer tires, lightweight automobile parts, and stronger composite materials in aircraft and spacecraft are only a few of the thousands of the innovative products of the business of chemistry. It is also an enabling and transforming business. U.S. companies engaged in the business of chemistry have remained internationally competitive, constantly creating new processes and products to solve performance, safety and efficiency problems in a number of industries and arenas.

The U.S. chemical industry is the world's largest, accounting for 27 percent of the total world chemical production. Moreover, in spite of wars and depression, the United States has maintained this number-one position since the 1910s. The chemical industry is the largest exporting sector in the United States, with exports totaling $68 billion in 1998. Balanced against imports of $55 billion, this provided a trade surplus of over $13 billion, continuing a more than seventy-year uninterrupted history of trade surpluses.

Defining the Business

The business of chemistry is not easily captured by either the Standard Industrial Classification (SIC) system nor the North American Industrial Classification System (NAICS). The definitional foundations of both are based on the concept of related production activities. In contrast, the business of chemistry is largely market driven (or focused). Participants in the industry have never viewed themselves along the lines of economic nomenclature but rather within four main segments - basic chemicals, specialty chemicals, life sciences, and consumer products - each with its own characteristics, growth dynamics, markets, developments and issues. The boundaries between each are not clearly defined and some degree of overlapping exists. Table 1 describes key characteristics or parameters.

Some convergence is occurring between segments, such as basic chemicals and specialties, and the next several decades will see the diffusion of biotechnology into more traditional chemistry businesses. The distinctions will blur even further, and biology and chemistry may eventually combine as the biosciences grow in importance. Increasingly, the business of chemistry will provide knowledge-intensive solutions to human wants and needs.

For brevity sake, this article excludes a discussion of branded consumer products (soap, detergents, bleaches, laundry aids, oral hygiene products, hair care products, skin care products, body care products, fragrances, etc.). Most companies in this packaged goods segment prefer to be viewed as household products companies.

Basic Chemicals

A $177 billion business in the United States, basic (or commodity) chemicals are produced in large volumes to chemical composition specifications that are homogeneous in nature, i.e., there is no product differentiation. Included are basic industrial chemicals (inorganic chemicals, bulk petrochemicals, organic chemical intermediates, plastic resins, synthetic rubber, man-made fibers, surfactants, dyes and pigments, printing inks, etc.) and [TABULAR DATA FOR TABLE 1 OMITTED] fertilizers.

Producers of basic industrial chemicals are selling molecules that are incorporated into a manufactured product or aid in processing. Basic industrial chemicals represent a $163 billion business, with fertilizers accounting for the remaining $14 billion. The latter largely comprises various compositions of nitrogen, phosphorous and potassium that are added to soil to replace or supplement essential nutrients to promote plant growth.

Basic chemicals is a mature business. The primary, markets are the manufacturers of other basic chemicals, specialties, and other chemical products as well as other manufactured goods (textile products, automobiles, appliances, furniture, etc.) or in the processing applications (pulp and paper, oil refining, aluminum processing, etc.). Markets also include some nonmanufacturing industries. Fertilizers, of course, are primarily used in agriculture.

Prices are largely driven by capacity utilization and feedstock (or raw material) costs, resulting in low profit margins and high degree of cyclicality over the business cycle. Long-term basic chemical prices are declining I to 3 percent per year in real terms. Indeed, the price of ethylene (a key petrochemical building block) in 1998 was the same as it was in 1980.