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Chemical Firms Sustain Investments

Expecting muted economic growth, chemical makers plan modest increases in R&D and capital spending this year

by Marc S. Reisch
March 28, 2012 | A version of this story appeared in Volume 90, Issue 9


Credit: Cabot
A Cabot scientist supervises extractions to determine product purity levels.
Cabot technician overlooks product extractions to determine purity levels
Credit: Cabot
A Cabot scientist supervises extractions to determine product purity levels.

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.

Spending will rise in 2012 for the third year in a row, reaching 6.8% of sales.NOTE: Values are for 14 chemical firms listed in the table on page 21. Excludes Ashland, Celanese, and Huntsman Corp. because 10 years of data are not available. SOURCES: C&EN surveys and estimates
Pair of line graphs show that spending will rise in 2012 for the third year in a row, reaching 6.8% of sales.
Spending will rise in 2012 for the third year in a row, reaching 6.8% of sales.NOTE: Values are for 14 chemical firms listed in the table on page 21. Excludes Ashland, Celanese, and Huntsman Corp. because 10 years of data are not available. SOURCES: C&EN surveys and estimates
R&D spending is on an upward track but will stay steady as a percentage of sales.NOTE: Values are for eight chemical firms listed in the table on page 21.SOURCES: C&EN surveys and estimates, White House Office of Management & Budget
Pair of line graphs show that R&D spending is on an upward track since 2002 but will stay steady as a percentage of sales.
R&D spending is on an upward track but will stay steady as a percentage of sales.NOTE: Values are for eight chemical firms listed in the table on page 21.SOURCES: C&EN surveys and estimates, White House Office of Management & Budget

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.

Credit: C&EN surveys
Table of research costs
Credit: C&EN surveys

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.

Credit: C&EN surveys
Table of capital investments
Credit: C&EN surveys

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. 

R&D In Emerging Countries Comes With Risks And Rewards

As chemical firms increased their R&D spending over the past decade, many of them enlarged their research capabilities in developing countries. Those overseas investments have helped companies gain market share and increase profits, but they are not without risk. Dow Chemical has about 900 people working in R&D labs in Asia, with the largest contingent, roughly 500 people, in Shanghai. Having experts on the ground in a region that has become a manufacturing powerhouse means Dow can better contour products for the local market, according to William F. Banholzer, the firm’s chief technology officer (CTO). “You can’t solve Asian customers’ problems from the U.S.,” he says. Just about all of Dow’s researchers in China are native to the region. Their familiarity with local markets has helped Dow develop coatings materials, for instance, that reduce airborne formaldehyde, a lung irritant and probable carcinogen that is still widely used in industrial processes in China. Banholzer acknowledges that he worries about intellectual property (IP) theft in developing countries in which legal protections may not be as robust as in more developed ones. But he points out that IP theft occurs in developed countries too. For instance, Kexue Huang, a Dow researcher who was based in Indianapolis, recently pleaded guilty in a U.S. court to stealing Dow technology for making the insecticide Spinosad (C&EN, Sept. 26, 2011, page 7). The best way for a company to protect itself, Banholzer says, is to make sure it has patent protection. Yakov Kutsovsky, Cabot’s CTO, agrees. “We made a conscious decision to patent our products in China,” Kutsovsky says. The commitment will go a long way to developing robust patent protection for all companies operating in China, including Chinese firms, he says. A smaller company than Dow, Cabot has 50 technical service employees at its Shanghai research center who tweak the firm’s product line to suit the needs of customers in China. Having such a team on the ground in the country is “a major competitive advantage,” Kutsovsky says. Although Cabot has not had any IP stolen, Kutsovsky says, the company takes a number of precautions in developing countries. For one, the firm takes steps to earn employee loyalty and keep turnover low. It also has protocols in place to safeguard information when it works with third parties. And it brings in critical technology from Europe and the U.S. only on an as-needed basis—and only with appropriate security precautions, he says. Like Dow, DuPont has a large contingent in developing countries. Combined, well over 1,000 researchers work at major DuPont research installations in Shanghai; Hyderabad, India; and Paulínia, Brazil, notes DuPont CTO Douglas Muzyka. These centers develop products for local markets and act as hubs connected to DuPont’s global R&D infrastructure. In China, for instance, local researchers developed a composite material strengthened with DuPont’s Kevlar p-aramid fiber for use in pipes that ventilate deep underground coal mines, Muzyka says. New products like this one helped DuPont’s sales in China increase by more than 80%, to $3.3 billion, between 2009 and 2011. “We are concerned about the environment for patent protection in developing countries,” Muzyka tells C&EN. But “IP challenges exist in both the developed and the developing world.” DuPont has had to deal with a number of well-publicized IP theft cases in the U.S. The most recent one involved charges that five people, including two former DuPont employees and an employee of a Chinese firm, stole DuPont trade secrets for producing the white pigment titanium dioxide (C&EN, Feb. 13, page 7). Muzyka, who spent four years as president of DuPont China, concedes that operating in China has its IP challenges. “You have to manage IP security the best way you can,” he says. But Muzyka cautions that “companies that withdraw from China because they have had a bad experience make a mistake. Without risk, there can be no reward.


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