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Chemical Makers To Boost R&D, Capital Spending In 2013

Spending plans vary widely among companies, representing diverse views on business opportunities

by Marc S. Reisch
March 11, 2013 | A version of this story appeared in Volume 91, Issue 10

 

AT WORK
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Credit: BASF
Chemist Neha Bajpayee researches dye intermediates at BASF’s organic synthetic lab in Mumbai, India.
A photo of chemist Neha Bajpayee working at BASF’s organic synthetic lab in Mumbai, India.
Credit: BASF
Chemist Neha Bajpayee researches dye intermediates at BASF’s organic synthetic lab in Mumbai, India.

The chemical industry’s biggest companies will again increase spending on research and capital equipment this year. But as was the case last year, many firms are concerned about the continuing weak economic recoveries in Europe and the U.S. and the less than robust economy of Asia.

Planners from individual chemical firms differ widely in their assessment of opportunities ahead and the money they are willing to commit to snagging business in the years to come. As a group, however, they are taking a cautious approach to future-oriented spending.

Ten U.S. and European companies tell C&EN they will, as a group, lift research spending 3.6% in 2013 to a combined $7.4 billion. The increase follows a 7.8% boost to the budget in 2012, when chemical firms spent $7.1 billion. The spending rise marks the third straight year of increases.

R&D spending for the group this year will be up a healthy 50% compared with 2003, although after adjusting for inflation the increase is only about 20% over the period. What has been consistent is that R&D spending as a percentage of company sales has hovered around 3.0% for most of the decade.

Eighteen U.S. and European firms say they collectively will bolster spending on new plants and equipment 1.9% this year to $18.7 billion. The modest uptick follows last year’s heftier 14.0% boost to $18.3 billion in capital expenditures. An increase in 2013 will mark the fourth year of annual spending increases after investment plummeted during the Great Recession.

To download a PDF of this article, visit http://cenm.ag/capitalrnd.

C&EN predicts that the survey group’s capital spending as a percentage of sales will be 6.2%, unchanged from last year. The figure is the high for the past decade. The estimate assumes average sales for the group will increase 2.0% in 2013. The 10-year low occurred in 2004 when the group spent just 4.5% of sales on equipment.

According to C&EN’s survey, the overall forecast for future-oriented spending is cloudy. For the 10 chemical firms—Albemarle, Arkema, BASF, Clariant, Cytec Industries, Dow Chemical, DuPont, Eastman Chemical, W.R. Grace, and Solvay—that supplied both R&D and capital spending data, combined budgets in 2013 will increase a less than enthusiastic 3.6% to $20.3 billion.

The modest increase in future-oriented spending shows how uncertain these firms are as a group about their prospects. In 2010, 2011, and 2012 their combined budgets rose 5.9%, 24.8%, and 8.8%, respectively, after a 15.3% dip in the recession year of 2009.

The ratio of investments in new production facilities to investment in R&D for firms that supplied both numbers will be slightly lower than in 2012. Budgets for 2013 direct 63.8% of funds to capital projects, slightly below the decade high of 63.9% in 2012. The low for the decade was 55.8% in 2009, when managers tightened the purse strings.

CAPITAL IDEAS
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Spending on plants and equipment will rise in 2013 but will hold firm at 6.2% of sales. NOTE: Values are for 17 chemical firms listed in the capital investments table on page 17. Excludes Arkema because 10 years of data are not available. SOURCE: C&EN surveys and estimates
A set of two charts. The first shows the spending toward capital by 17 firms tracked by C&EN. The second shows the percentage of sales that the aforementioned investment comprises.
Spending on plants and equipment will rise in 2013 but will hold firm at 6.2% of sales. NOTE: Values are for 17 chemical firms listed in the capital investments table on page 17. Excludes Arkema because 10 years of data are not available. SOURCE: C&EN surveys and estimates

Generally, R&D funding doesn’t fluctuate as widely as capital spending does. So when the economic outlook improves, capital spending rises and a proportionately smaller share of future-oriented budgets goes to research.

RESEARCH IN MOTION
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R&D spending continues upward momentum but will stay steady as a percent of sales. NOTE: Values are for nine chemical firms listed in the research costs table on page 17. Excludes Arkema because 10 years of data are not available. SOURCES: C&EN surveys and estimates, White House Office of Management & Budget
A set of two charts. The first shows the spending toward research and development by 17 firms tracked by C&EN. The second shows the percentage of sales that the aforementioned investment comprises.
R&D spending continues upward momentum but will stay steady as a percent of sales. NOTE: Values are for nine chemical firms listed in the research costs table on page 17. Excludes Arkema because 10 years of data are not available. SOURCES: C&EN surveys and estimates, White House Office of Management & Budget

This year, 36.2% of future-oriented spending is aimed at research, a tad higher than the decade low of 36.1% in 2012. The decade’s high was 44.2% in 2009, when, despite the recession, surveyed companies increased R&D budgets.

Budgets can and do change over the year. Companies surveyed in February 2012 (C&EN, Feb. 27, 2012, page 20) predicted they would increase 2012 research expenditures 3.0%, but companies in this year’s group say they actually hiked spending 7.8%. Those in last year’s survey predicted they would boost capital spending budgets 14.1%. The prediction was pretty close to the 14.0% increase posted by this year’s group.

Of the 10 firms that supplied R&D spending forecasts, nine plan increases in 2013 and one plans to hold spending at last year’s level. This compares with seven that increased budgets last year and three that made cuts.

Belgium-based Solvay plans the largest R&D percentage increase, 14.9%, among the group in 2013. The increase reflects, in part, Solvay’s acquisition of French chemical maker Rhodia in the fall of 2011. It also includes support for new research capabilities in India and China.

BASF, the chemical industry’s largest R&D spender, will continue a series of aggressive increases with a 5.0% rise in research spending this year. “Innovations are the basis for future profitable growth and thus lie at the core of our competitiveness,” said BASF Chairman Kurt Bock at the firm’s annual press conference last month.

Eastman Chemical is planning the third-largest percentage increase in R&D spending among this year’s group. The 4.0% increase from the 2012 level in part reflects the acquisition of specialty chemical maker Solutia, completed in July 2012. The increase will go toward developing new product opportunities, says Gregory W. Nelson, Eastman’s chief technology officer, including those to be realized from the Solutia deal.

Of the 18 firms that C&EN polled for their capital spending plans, 13 say they will increase spending and five say they will make cuts. Last year’s aggregate results were the same.

Cytec Industries plans to more than double capital outlays as it ramps up capacity in its engineered-materials and process separations business. Engineered materials include carbon fibers now in heavy demand for new generations of composites used in the latest Airbus and Boeing airplanes.

FMC expects a 55.6% jump in its capital budget, much of which it plans to invest in a $100 million microcrystalline cellulose plant, now under construction in Rayong, Thailand. The firm says the plant will help meet growing Asian demand for the food and beverage ingredient.

In contrast, Albemarle is pulling back on capital spending 42.0% compared with 2012 to levels more consistent with its past spending. Over the past two years, a spokesman explains, the firm spent heavily on now-completed projects to double bromine capacity in Jordan, add polyolefin catalyst capacity in Saudi Arabia, and increase production of electronic-grade materials in South Korea.

Dow Chemical cited deterioration in the business environment as the reason it plans to cut capital outlays 23.5% this year. “The second half of 2012 saw significant deterioration in the markets we serve, particularly in China,” noted Andrew N. Liveris, Dow’s chief executive officer, when he announced 2012 results at the end of January. As a result, he told investors, Dow will cut capital spending in 2013 by approximately $700 million compared with original plans.

The American Chemistry Council (ACC), the chemical industry’s main trade association, is aggressive in its forecast of future-oriented spending, but other organizations have outlooks that are more cautious.

According to a survey conducted last fall by ACC’s economics and statistics department, capital investment in the U.S. chemical industry grew 15.5% in 2012 to $38.1 billion. Chemical firms budgeted $43.4 billion on U.S. capital projects this year, up 14.0%, the survey found.

Long-term, ACC’s economists are bullish on U.S. capital spending as chemical makers position themselves to take advantage of the increase in low-cost domestically produced shale gas. They confidently predict that U.S. capital spending will reach $64.5 billion by 2017 largely because of the opportunities afforded by shale gas.

The trade association’s survey also found that U.S. chemical firms increased R&D budgets 3.5% in 2012 to $58.1 billion. Looking ahead, the group’s economists found that chemical makers are planning a 4.0% budget increase in 2013 to $60.4 billion. ACC’s survey includes pharmaceutical research, which the economists say will not be quite as buoyant as it has been in the past.

The nonprofit research group Battelle takes a global perspective on research spending writ large. The group’s “2013 Global R&D Funding Forecast,” put together with R&D Magazine, predicts global R&D spending will reach $1.5 trillion this year, up 3.7% from the year before. Published in December 2012, the forecast says the largest share of the increase, about $23 billion, will come from China.

In the U.S., 2013 R&D budgets are up 1.2% to $424 billion, according to Battelle’s forecasters. Industrial R&D funding in the U.S. is set to reach $262 billion, up 2.3%. However, U.S. chemical and advanced-materials makers will increase global R&D a scant 0.6% to just below $42 billion in 2013.

Another annual survey, conducted last summer, takes into account attitudes of research leaders at a variety of medium-sized to large U.S. industrial firms. According to the Industrial Research Institute’s “2013 R&D Trends Forecast” (DOI: 10.5437/08956308X5601914), 89% of R&D managers predicted that R&D spending will remain the same or increase in 2013. Only 11% said spending will be lower.

The survey found that chemical company investment in basic research, new business-related R&D projects, and lab construction and equipment will rise sharply. Chemical R&D managers, who represented 30 out of 114 surveyed, were much more positive than managers from industries such as food, industrial machinery, and consumer products.

Given the anemic economic outlook, authors of the IRI survey noted that “most respondents are preparing for a period of managed growth, in contrast to the cycles of rapid contraction and expansion that have characterized recent years.”

However, C&EN’s annual spending surveys suggest business cycles will continue to influence both R&D and capital spending. More cash will go to future-oriented spending in flush times, and less money will flow when profits get squeezed.

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