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Economy— It's a Go for Chemicals

Forecasts indicate business is better and will continue to improve through next year

August 2, 2004 | A version of this story appeared in Volume 82, Issue 31

July was a month for fairly optimistic economic predictions--although some came with a warning. Federal Reserve Board Chairman Alan Greenspan told Congress that the current expansion in the U.S. is sustainable and that inflation is not a major threat at this time, although it is creating some price pressure.

Greenspan told the Senate Banking Committee, "Not only has economic activity quickened, but the expansion has become more broad-based and has produced notable gains in employment."

A forecast by the National Association for Business Economics (NABE) predicts healthy growth through the rest of this year and into 2005, despite tighter monetary policy. And the American Chemistry Council (ACC) sees better times not only for the U.S. chemical industry, but also for chemicals around the world.

The NABE report, which covers the entire U.S. business economy, shows improvements in many areas. Duncan H. Meldrum, president of the organization and chief economist at Air Products & Chemicals, tells C&EN, "This is the kind of survey we get when we are finally moving into the stage where everything is growing in the economy."

He notes that survey respondents indicated that product demand is strong, and that current hiring and plans for future hiring are both up and positive. Capital spending and the expectations of spending more capital in the future are stronger for the manufacturing industries, including chemicals, than they have been in a long time.

"We do see risks on the cost side," Meldrum says, "which may be contributing to the caution that some people have talked about. Our survey has shown the inflation cycle for some time, and those of us in the chemical industry have really been experiencing it with the higher energy costs and the inability to pass these costs on to customers. We've had to absorb them and look for ever stronger productivity gains to try to improve margins."

Meldrum says the outlook for the chemical industry should be good, "with the caveat that the forecasts for both housing and autos--both major end-use markets for the chemical industry--continue to suggest that as we get rising interest rates, growth will slow in these markets. That is a damper for the chemical industry."

The ACC midyear outlook goes into more detail about the effect of the recovery on chemicals than the NABE survey and is also more global, but its message is essentially the same: a stronger and broader recovery. "At the midpoint of 2004, it is clear that the global economic recovery that accelerated in mid-2003 has spread wider and become more balanced, pulling the chemical industry along with it," says T. Kevin Swift, ACC's senior director of economics and statistics. "In the U.S., the industrial recovery is certainly broadening and accelerating and now includes virtually all of the key end-use customer industries in manufacturing." Among the markets he notes are rubber and plastic products, electronics, paper, and textiles.

Like Meldrum, Swift sees threats on the cost side. "One major risk," he says, "is the high cost of oil, which could slow global economic growth appreciably as well as lead to high and volatile feedstock--and other raw material--and energy costs. The high cost of natural gas complicates the situation further in North America. High natural gas prices resulting from the inadequacy of supply and rising electrical generation demands have caused the competitive advantage for U.S. petrochemical production to disappear."

DESPITE THIS worry over costs, the ACC outlook sees sustained expansion in the overall U.S. economy, with economic growth accompanied by job creation. This will translate into improved business for the U.S. chemical industry.

When ACC last prepared an official outlook for the U.S. chemical industry in late 2003, the trade group was expecting a 3.3% increase in production in 2004. The latest assessment, however, predicts 4.5% overall chemical industry output growth in 2004, slowing to 3.8% next year.

Basic chemicals, the outlook says, are experiencing a cyclical rebound as manufacturing activity continues its recovery. Basic chemical output is expected to rise 4.3% in 2004, moderating to 2.5% in 2005. The outlook indicates that the strengthening of the dollar against other currencies will limit 2005 gains despite a continued global recovery.

And ACC predicts a continued global recovery. In major chemical-producing countries, the pattern of better growth in 2004 followed by moderating improvement next year predominates. For instance, in China, which has enjoyed double-digit growth in chemical production for some time, ACC sees 17.3% growth this year, followed by a 10.3% year-to-year improvement in 2005.

Likewise, Indian chemical production is expected to increase 12.5% in 2004, followed by a slower 8.8% growth next year.

In major European chemical-producing countries, where the recovery has lagged, 2005 growth will often be better than that in 2004. In France, ACC expects 2.5% chemical production growth in 2004, rising to 3.3% in 2005. Germany will see an improvement of 2.3% this year and an improvement of 2.8% next year. And Italy's chemical output will rise just 1.3% in 2004, followed by a 2.3% increase next year.

For the chemical world as a whole, ACC forecasts a 5.0% global gain in chemical production this year, followed by a moderately slower 4.3% improvement in 2005.



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