Chemical Firms Sustain Investments

Chemical companies plan to increase spending on research and equipment this year but at a slower pace than they did last year. Concerned over the sovereign debt crisis in Europe, a weak economic recovery in the U.S., and a slowdown in the pace of growth in Asia, many chemical executives are tempering their future-oriented spending plans, according to C&EN’s annual survey.

Seventeen U.S.-based firms say they will boost spending on new plants and equipment by 14.1% this year to a combined $13.0 billion. The increase marks a more modest uptick in capital expenditures compared with last year’s hefty rise of 31.2% to $11.4 billion. Nonetheless, this year will mark the third annual spending increase after 2009, when investment sank during the Great Recession.

Eight U.S.-based firms report they will lift their research spending by 3.0% in 2012 to a combined $4.4 billion. The increase follows an 8.5% budget boost in 2011 to $4.3 billion and points to the continued importance of R&D for the group. Even the recession did not interrupt the companies’ support for this important discovery activity.

According to C&EN’s survey, the overall forecast for future-oriented spending continues to be bright. For the eight firms—Cabot, Cytec Industries, Dow Chemical, DuPont, FMC Corp., W.R. Grace, Lubrizol, and NewMarket—that supplied both capital spending and R&D data, combined budgets in 2012 will increase 4.4% to $10.3 billion. Their combined budgets rose 19.2% and 19.6% in 2010 and 2011, respectively, after plummeting 18.8% in 2009.

The ratio of investment in new production facilities to investment in research is higher for the third consecutive year. Budgets for 2012 shuttle 57.4% of funds to capital projects, up from 56.8% in 2011 and 52.4% in 2010. The high for the decade was 60.9% in 2008, and the low was 49.8% in 2009, when managers hit the capital spending brakes during the Great Recession.

R&D funding generally doesn’t fluctuate as much as capital funding does. So when the economic outlook is up, capital spending rises and a proportionately smaller share of future-oriented budgets goes to research. This year, 42.6% of future-oriented spending is targeted at research, down from 43.2% in 2011. The decade’s high was 50.2% in 2009 when, despite the recession, surveyed companies increased R&D budgets. The low was 39.1% in 2008.

Budgets can change over time, and they did just that in 2011. Companies surveyed last February (C&EN, Feb. 21, 2011, page 19) predicted they would increase 2011 research expenditures by 2.8%, but the companies in this year’s group say they actually hiked spending by 8.5%. Similarly, those in last year’s survey expected to step up 2011 capital spending by 26.5%. Those in this year’s group say they actually boosted spending by 31.2%.

Of the 17 firms polled for their 2012 capital spending plans, 15 expect to increase spending, and two say they will make cuts. This compares with 16 that expanded budgets in 2011 and one that made cuts.

Cytec Industries plans to nearly double capital outlays to add capacity for its engineered materials and process separations businesses. Projects include increasing capacity to supply carbon-fiber composites used in aerospace applications. The firm is also spending $125 million to double capacity at its Welland, Ontario, site for phosphine gas and derivatives used in electronics, mineral processing, and agricultural fumigation.

Ashland expects to increase capital outlays by 74.1% to $350 million in 2012. In a meeting with analysts in November 2011, Lamar M. Chambers, chief financial officer, explained that the acquisition of International Specialty Products at the end of August and “numerous projects we’re now pursuing” are behind the firm’s increased spending. He added that he expects Ashland to continue to spend roughly $350 million in each of the next two years to take advantage of “strong growth dynamics” in the company’s specialty ingredients business.

Albemarle has slated a 51.5% increase in capital spending. Projects include a polyolefin catalyst expansion in South Korea and the construction of a facility in Saudi Arabia with joint-venture partner Saudi Basic Industries Corp. to make triethylaluminum, a Ziegler-Natta cocatalyst used in polyethylene production. The firm also has a bromine expansion under way at its Jordan Bromine joint venture with Arab Potash.

C&EN predicts that the survey group’s capital spending as a percentage of sales will be 6.8% this year, the high for the past 10 years and up from 6.3% in 2011. The estimate assumes group sales will increase 3.0% in 2012. The 10-year low occurred in 2004 when the group spent just 4.6% of sales.

Of the eight firms that provided their R&D spending forecasts, seven plan increases and one plans no change. Last year, six pushed up spending, and two cut back.

Lubrizol plans the largest R&D percentage increase, 6.5%, among the group in 2012. Some of the increase will go to advancing lubricant additive research in the U.S., the U.K., China, Japan, and India, where the firm has been upgrading its labs. Lubrizol was purchased in September 2011 by Berkshire Hathaway, a conglomerate controlled by billionaire investor Warren Buffett.

FMC is slating a nearly 5% increase in R&D spending this year. The firm plans to direct funds across its product lines, which include agricultural chemicals, specialty chemicals such as lithium for car batteries, and industrial products. NewMarket, the parent of fuel additives maker Ethyl and lubricant oil additives maker Afton Chemical, also plans a nearly 5% increase in R&D.

BASF, the chemical industry’s largest R&D spender in absolute terms, is not in this year’s survey because it provided its R&D spending plans too close to C&EN press time to be included in the analysis. However, it plans to spend nearly $2.4 billion on research this year, up 5.9% compared with 2011. The rate at which BASF plans to increase spending is more than twice that of the largest R&D spender in the survey, DuPont, which plans a 2.2% increase to $2.0 billion. A BASF spokesman explains that the firm continues to increase R&D spending as it emphasizes growth through innovation.

Other surveys of spending plans also find that chemical makers are cautiously increasing future-oriented investments. According to the economics and statistics department of the industry group American Chemistry Council (ACC), high energy prices, the debt crisis in Europe, a slowdown in economic growth in China, and last year’s earthquake in Japan all contributed to a global soft patch centered in manufacturing.

In the future, ACC economists say, developed nations will continue to grow slowly while emerging markets grow more rapidly because of industrialization and consumer-driven demand. As a result, 90% of year-over-year increases in chemical industry capital spending will be directed to emerging markets between now and 2016.

The trade association’s fall survey of the chemistry enterprise found that global capital spending by chemical firms increased 10.0% to $511 billion in 2011 and should rise 9.0% to $557 billion in 2012. By 2016, ACC predicts, the global industry’s capital spending will reach more than $800 billion.

In the U.S., ACC’s survey found, capital spending rose 7.0% in 2011 to $29.4 billion, and it will rise an additional 7.3% this year to $31.5 billion. Much of the spending will go toward replacing worn-out plants and equipment. Moving ahead, the economists say, the development of shale gas will be a game changer that will lead to new investments in petrochemicals and derivatives.

When it comes to R&D, ACC’s survey found that U.S. chemical firms increased R&D budgets by 3.5% in 2011 to $57.4 billion and plan to increase spending another 4.0% in 2012 to $59.7 billion. The survey includes pharmaceutical research spending, which the group says will rise at a faster pace than nonpharmaceutical spending.

Taking a global perspective, the “2012 Global R&D Funding Forecast,” put together by R&D Magazine and the nonprofit research group Battelle, predicts that worldwide R&D spending by all industries will grow 5.2% in 2012 to $1.4 trillion. Asian countries, according to the report, are leading the growth with an 8.6% increase in spending. European R&D will grow by 3.5%, and U.S. spending will rise 2.1%.

The data, which include government R&D spending, indicate that U.S. federal government research spending will slip 1.6% in 2012. However, academic funding will rise 2.9%, and industrial outlays will increase by 3.8%.

Published in December 2011, the report takes note of the rising share of global R&D by China and India. Although the U.S. continues to lead other countries by performing almost one-third of global R&D, Asian countries as a group fund 36.7% of it. China has rapidly increased its share from 12.0% in 2010 to an expected 14.2% in 2012, and India’s share has grown from 2.6% to 2.9%. Over the same time period, the U.S. share has slipped from 32.8% to 31.1%.

Another annual survey takes into account research attitudes among a variety of medium-sized to large U.S. industrial companies. According to the Industrial Research Institute’s (IRI) “2012 R&D Trends Forecast,” 41% of 104 respondents plan a 2.5% or greater increase in R&D spending, about 53% plan to hold spending at about the same level, and 6% plan to make cuts.

R&D managers who responded to the survey during the summer of 2011 “revealed steady optimism regarding their budget outlook,” says Richard R. Antcliff, chair of IRI’s research-on-research team. As a result, “R&D hiring remains positive,” he notes, “with an intensified focus on retaining top technical talent.”

Weighing heavily on the minds of R&D leaders are ways to effectively manage innovation. Aware that their efforts are often the catalysts for prosperity and growth, many leaders are concerned about “showing the payoff on innovation to win senior management support and finding the right balance of technology and innovation investments,” Antcliff writes in the trends forecast.