Priming The Pump

As the economic recovery gained momentum last year, chemical companies injected new funds into research and equipment. And with the outlook for 2011 appearing reasonably good, chemical firms expect to continue bolstering their future-oriented spending, according to C&EN’s annual survey.

Nineteen international firms say they will boost spending on new plants and equipment by 26.5% this year to a combined $11.5 billion. Their planned investment will mark a significant uptick from last year when the group increased capital expenditures by 14.8% to $9.1 billion. This year also represents a second year of increased spending after investment plummeted during the 2009 economic slowdown.

Fourteen international companies plan a 2.8% rise in their research budgets in 2011 to a combined $6.5 billion. The spending increase follows a 10.9% rise in 2010 and marks the continuation of a long-term increase in annual research expenditures for the group. Even during the economic slowdown, the firms maintained the upward momentum in R&D investment.

Overall future-oriented spending continued on an upward path for the second year in a row. For the 12 firms—Albemarle, Arch Chemicals, Cabot, Cytec Industries, Dow Chemical, DuPont, FMC, Lubrizol, Nalco, Praxair, Solutia, and Süd Chemie—that supplied both R&D and capital spending data, combined budgets in 2011 will increase 15.2% to $11.7 billion. Spending levels rose 16.6% in 2010 after falling 18.8% the year before.

The ratio of investment in new equipment to investment in research is on the upswing for the second year in a row. Budgets for 2011 direct 63.5% of funds to capital projects, up from 59.3% in 2010. The decade-low share was 56.9% in 2004. The decade high was in 2008 when 67.1% of future-oriented funds were directed to capital improvements.

Funding devoted to R&D generally does not fluctuate as much as capital funding does. When the outlook for the economy improves, capital spending rises and a smaller share of future-oriented budgets goes to R&D. This year, 36.5% of future-oriented spending is pegged for research, down from 40.7% in 2010. The decade low was 32.9% in 2008, and the decade high was in 2004 when the figure rose to 43.1%.

Budgets frequently change over the course of a year, and 2010 was no exception. Companies surveyed last February expected to increase 2010 capital spending by 9.4%. However, firms participating in C&EN’s survey this year say they actually upped spending by 14.8%. Similarly, last year’s group expected to push up R&D spending by 2.1%. This year’s group says spending actually rose by 10.9%.

Of the 19 firms surveyed for their 2011 capital spending plans, each and every one plans an increase in new plant and equipment outlays, with many projects earmarked for Asia. This compares with 14 that increased spending in 2010 and five that cut it.

Cabot, which plans to more than double capital outlay to $250 million, says it will invest in three key projects in Asia: fumed silica and carbon black master batch plants in China and a rubber black plant in Indonesia. The firm will also spend more on maintenance of existing plants to catch up on work it had deferred during the economic downturn.

Arch plans to increase capital spending by 89.7%. The investment boost will fund a major technology upgrade at the firm’s U.S. water treatment chemicals plant and the consolidation of three U.S. R&D sites into a newly leased facility in Alpharetta, Ga.

Solutia plans an 89.4% increase in capital spending this year. The company has a number of projects under way in Asia, including doubling capacity for insoluble sulfur, a rubber-vulcanizing agent, in Kuantan, Malaysia, and increasing capacity for the solar-cell encapsulant ethylene vinyl acetate in Suzhou, China. The firm is also expanding capacity for polyvinyl butyral, an automotive safety glass interlayer, in Ghent, Belgium.

C&EN predicts that the survey group’s capital spending as a percentage of sales will be 6.0% this year, up from 5.1% in 2010. The estimate assumes group sales will increase 8.0% in 2011. The ratio hit a 10-year high in 2001, when capital projects accounted for 6.4% of sales. The decade low occurred in 2004 when the group spent only 4.6% of sales.

Of the 14 firms surveyed for their R&D spending forecast, 12 say they plan to increase spending in 2011, and two plan no change. This compares with 10 that increased expenditures in 2010 and four that made cuts.

Arch plans the largest percentage boost among the group in 2011. The firm says its 25.0% increase will allow it to pour more money into innovation after pulling back in 2010.

Praxair expects to enlarge its R&D investment by 17.7%. The industrial gases company says it plans to step up applications technology development efforts to help its customers improve efficiency and environmental performance.

Albemarle says its R&D investment, which will rise by 17.2%, will be spread out across all of its product lines. A spokesman says the firm is seeing commercial opportunities such as in polymer catalysts and mercury abatement technology for coal-burning power plants.

BASF, the biggest R&D spender in absolute terms, says its nearly $2 billion R&D budget supports 9,600 employees working on about 3,000 projects. At a press conference earlier this month, Andreas Kreimeyer, BASF’s executive research director, said a combination of internal and cooperative projects “helps us bring innovation more rapidly into the market. This gives us an edge in global competition.”

BASF products that have been on the market for five or less years generated sales of nearly $8 billion in 2010, Kreimeyer said. New products will generate as much as $10.6 billion in sales by 2015, he predicted.

DuPont and Dow are tied at second place in C&EN’s R&D survey, with each planning to spend $1.7 billion on R&D this year. William F. Banholzer, Dow’s chief technology officer, calls R&D “the key enabler to growth.”

The risk-adjusted current value of Dow’s portfolio of R&D projects over the next 10 years is $12 billion, Banholzer says, up from $10 billion when the firm assessed the portfolio in 2009. About 19% of projects involve short-term tweaks to existing products, 61% involve midterm product-line breakthroughs, and 20% involve disruptive technology such as solar shingles and energy storage solutions.

According to Douglas Muzyka, DuPont’s chief science and technology officer, about 85% of the firm’s R&D resources support megatrends related to agricultural productivity, alternative fuels, energy-efficient materials, and safety and protection. The firm employs about 8,500 scientists, not counting those who will join the firm once DuPont completes the acquisition of enzymes maker Danisco, announced last month (C&EN, Jan. 17, page 7).

Other surveys of spending plans also find that chemical makers are ramping up future-oriented investments. According to the American Chemistry Council’s (ACC)economics and statistics department, global plant operating rates are on the upswing, meaning prospects for chemical firms are good for the next few years.

The trade group’s economists say their fall survey of global capital spending by chemical firms shows expenditures rose 7.7% in 2010, and they predict spending will rise 13.5% in 2011. About 90% of the gain will come from emerging markets in Asia, Africa, and the Middle East, they say.

In the U.S., ACC economists say, capital spending fell 1.4% in 2010 but will rise 6.0% in 2011. Most of the U.S. spending will be to replace worn-out equipment rather than to build new plants. However, because of new supplies of natural gas found in shale, “it is possible that a reevaluation of the U.S. as a favorable location for investment will occur,” they project.

As for R&D, ACC economists say investment was up 2.8% in 2010 and will likely increase another 3.3% in 2011. The focus of R&D, their survey shows, is on improving product and manufacturing efficiencies and on leading-edge product innovations.

Taking a macroeconomic perspective on research, “2011 Global R&D Funding Forecast,” put together by R&D Magazine and the nonprofit research group Battelle, predicts that R&D spending in the U.S. will reach $405 billion this year. The figure, which includes government, industry, and academic funding, represents a 0.9% increase over 2010 in inflation-adjusted spending.

The report, published in December 2010, notes that globalization is narrowing the R&D gap between countries. Although the U.S. still leads all countries by funding one-third of global R&D, Asia’s stake in R&D spending continues to increase. China, for instance, will account for 12.9% of global R&D this year, up from 11.2% in 2009. India will account for 3.0%, up from 2.5% in 2009.

The Industrial Research Institute’s survey of a broad range of U.S.-based industrial companies, conducted in the summer of 2010, found that respondents are planning “a significant upturn in R&D spending in 2011.” According to the IRI report, “R&D Trends Forecast for 2011,” about 54% of 119 respondents plan a 2.5% or greater increase in R&D spending, about 33% plan to hold spending at about the same level, and 13% plan to make cuts.

As the focus on innovation intensifies, “we are seeing a heightened level of optimism from R&D managers for the first time since 2008,” says Richard Antcliff, chair of IRI’s Research-on-Research team. The study shows that “R&D managers are also paying significant attention to business strategies of global R&D placement and the use of joint ventures and alliances,” he says.

What continues to keep R&D directors up at night is “worrying about how to balance long- and short-term considerations,” Antcliff says. The same is no doubt true of corporate planners who must continually adjust capital-spending plans to keep up with changing market conditions.