Demand And Costs Rise In Tandem

The global chemical industry enjoyed continued strong demand in 2007, even as prices shot up for petrochemical feedstocks. Producers raised prices, but not dramatically; therefore, increased sales did not lead to higher profits in the U.S. or Europe. On the whole, however, firms were able to extend the solid financial performances of 2006.

In the U.S., shipments of all chemicals in 2007 rose 9.0% to $629.3 billion after a 5.0% increase in 2006. Excluding pharmaceuticals, the value of shipments for all other chemical products jumped 9.7% to $464.2 billion. In 2006, the increase in shipments for chemicals not including drugs was just 2.7%.

Unlike the U.S., Canada saw shipments decline in 2007, with basic chemicals, petrochemicals, and plastics dragging the industry downward. A bright spot, as it was in the U.S., was the agricultural chemical segment, which saw a 13.5% increase in shipments.

Most European countries posted strong growth in shipments, including big player Germany, which saw an increase of 7.8%.

In 2007, prices for many chemical products rose, slightly impacting financial performance in some industry segments.

U.S. chemical makers weren't able to raise prices enough in 2007 to keep pace with price increases in the broader economy. Chemical prices rose by 4.4% during the year, and prices for commodities overall went up by 4.8%. The strongest chemical sectors were those whose products are used or produced on farms. Prices for inedible fats and oils rose 28.1% during 2007, and agricultural chemical prices increased by 14.5%.

Canadian chemical prices rose a more modest 2.7% in 2007. A few segments saw prices decline versus 2006, including polyethylene, for which prices eroded by 2.4%. Inorganic chemicals, particularly ammonia, had the biggest price increases, jumping by 21.9% and 39.7%, respectively.

In Europe, chemical producer prices—after stripping out pharmaceuticals—increased at a slower rate during 2007 than they did in 2006. Not surprisingly, the petrochemicals sector led the way because it experiences the most direct impact from rising oil prices. Price hikes in the more downstream sectors of consumer and specialty chemicals were more moderate. And pharmaceuticals actually saw decreasing producer prices in 2007.

Chemical producers in the U.S. were also paying more for their raw materials and other expenses, although eight of the top 10 firms also increased sales by more than 5% apiece. The result was that for 30 chemical companies surveyed, the average profit margin fell slightly to 6.8% in 2007 from 7.0% the year before.

Each of the four major Canadian chemical firms increased sales in 2007, with the biggest gains coming from fertilizer makers Potash Corp. and Agrium. Those two companies were also tops in Canada for profit gains.

At European companies, performance by and large was good. Most firms rang up respectable increases in sales in 2007 over 2006, but profitability fell somewhat from the buoyant results of 2006.

In Japan, the 12 companies surveyed by C&EN offered a mixed picture. Shin-Etsu Chemical's net earnings went up 19%, whereas at Sumitomo Chemical, earnings shrank by one-third.

The decent performances of 2007 meant that many firms could invest in their facilities. Spending on plants and equipment by 22 major U.S. chemical firms rose an admirable 10.6% in 2007 to $9.21 billion; still, this growth was less than half that seen in 2006, when capital spending soared 22.6%.

R&D spending among these companies also increased, but not at the same rate as capital spending. Research spending for the chemical firms grew 6.6% to $5.38 billion after a 5.9% increase in 2006. Among eight major pharmaceutical companies, R&D spending soared 8.6% to $36.1 billion, but this came after a 10.1% drop in 2006.

Likewise, for most European chemical companies charted by C&EN, more money went to capital investment. R&D showed a more mixed picture: Although total spending for the companies included was up, some companies were making substantial spending cuts in this area.

Despite their unsteady performance, the Japanese firms collectively raised their capital expenditures by 8.3% to more than $10 billion and their R&D spending by more than 10% to nearly $4.3 billion.