Where is the chemical industry going?

Business Economics, Oct, 1999 by T. Kevin Swift

Globalization

Facing a mature market and modest long-term growth potential at best, U.S. chemical producers during the past ten years have been lured by the potential growth among the large markets emerging in East Asia (and elsewhere). Per capita chemical sales, for example, are only $75 in China as compared with $1,500 in the West. Growth potential has often been a multiple of growth in the United States. In addition, companies are able to spread overhead costs over a larger volume of sales by going global.

TABLE 5

CHEMICAL INDUSTRY GLOBAL GROWTH PROSPECTS

                                             1998        1998-2010
                                           CHEMICAL         REAL
                                             SALES         GROWTH
                                         ($ BILLIONS)      (% PA)

United States                                 $406          2 1/2
Canada                                          27          2 3/4
Mexico                                          19          4 1/4
Other Latin America                            108          4 1/2
Western Europe                                 390          2
Central/Eastern Europe                          56          2 3/4
Africa                                          40          3
Mideast                                         34          3 1/4
Japan                                          171          2
China & East Asian NICs                        202          6
Other Asia/Pacific                              79          5

Total                                       $1,531          3 1/4

Globalization is a fact and evidenced by growth in global trade in chemicals some 1.7 times that of sales (or production). Global chemical exports are now $510 billion and account for 33 percent of total world output of basic chemicals, specialties, life science products, and related chemical products. Moreover, one-third of the $1.53 trillion in global chemical sales now lie outside the United States. Canada, Western Europe, and Japan. Looking long-term, growth prospects are clearly more favorable in Mexico, Latin America, China, the Asian NICs, and other Asia/Pacific. Growth in these nations and regions will be 1 1/2 to 2 1/2 times that in the United States.

Globalization is further evidenced by the allocation of capital budgets among CMA member companies. Every year CMA conducts a survey of long-term geographic investment intentions (U.S. vs. foreign locations). The latest, conducted in late 1998, shows that, in spite of the crisis in East Asia. U.S. chemical companies are planning to boost their investments significantly in that part of the world. Asia's share will nearly double within the next five years. U.S. chemical companies also plan to allocate greater capital investment in Central/Eastern Europe as well as in Latin America. This expansion will occur largely at the expense of projects in the United States, Canada, Western Europe and Japan.

Consolidation

As well as continued cost reduction efforts, consolidation will occur in all segments of the business of chemistry. It is often occurring along regional lines and can involve some major transactions, with average deal size increasing. Joint ventures have become an important strategic vehicle as companies share technologies and cut costs. Indicative of this consolidation is the annual list of top chemical producers tabulated by Chemical & Engineering News, a leading trade journal. For two decades, the staff of the journal has tabulated a list of the top 100 chemical producers as ranked by sales. In light of the M&A activity that has occurred during the past year, the latest ranking (for 1998) was limited to only seventy-five companies.