Chemical Outlook 2015 By Market

Oil prices imploded in 2014, and experts say they will decline further before recovering later in 2015. The drop is a challenge to the natural-gas-based petrochemical industry in the U.S., but producers should remain competitive versus the rest of the world.

After hitting a peak of more than $105 per barrel last June, oil prices dropped below $60 in December. Oversupply in the marketplace is running 700,000 bbl ahead of global demand of about 92 million bbl per day, according to the Energy Information Administration. This overhang, EIA says, will persist through the middle of the year, putting downward pressure on prices.

That’s good news for chemical companies in Asia and Europe, which make ethylene primarily from oil-based naphtha. Most U.S. chemical makers crack natural-gas-derived ethane, which has been cheap since the shale gas boom began late last decade. But now the oil price decline is pinching their cost advantage.

For example, high-cost Asian producers set global prices for petrochemical derivatives such as polyethylene, notes Dewey Johnson, senior director of market research for IHS Chemical. Lower oil prices are starting to push those prices down.

However, strong demand at home might mute the impact for U.S. companies. “I don’t think it is a given that the U.S. matches Asian movement,” Johnson says. “I would expect there will be reduced margins for U.S. producers—but still very favorable margins.”

Sergey Vasnetsov, head of strategic planning and transactions at LyondellBasell Industries, made a similar assessment before an investor conference last month. It costs between 10 and 15 cents to make a pound of ethylene in a U.S. ethane cracker, he said, and 40 to 60 cents to do so in naphtha crackers elsewhere. Lower oil prices might bring costs for naphtha crackers down somewhat, but not to North American levels.

And the economic effect of lower oil prices should be beneficial, Vasnetsov pointed out, citing a rule of thumb that the global economy gets a 0.2% lift in annual growth and a 0.5% reduction in inflation for every $15 decline in oil prices. “If the global economy will experience higher growth and low inflation, I think that bodes well for the chemical business,” he said.

What happens to the dozens of chemical plant construction projects on the U.S. Gulf Coast depends on the length and duration of the oil price decline, IHS’s Johnson observes. However, he doesn’t expect companies that have started building to pull back now. Plants still at the planning stage, with few costs already sunk, might be delayed.—Alex Tullo

The market for paint and construction materials will expand in the U.S. this year as the economy gathers strength. But construction abroad is on the downswing as growth in China slows, Europe continues struggling, and parts of Latin America remain in recession.

The trade group American Chemistry Council says it is cautiously optimistic about the U.S. housing industry, where each building start represents about $15,000 in chemical sales. Although finances among first-time home buyers remain weak, interest rates are still at historic lows.

ACC expects new housing starts to rise by 20% in 2015 compared with 2014. Overall construction, including commercial buildings and infrastructure, should be up about 6.7% this year, the trade association predicts.

Thomas Petti, president of Grace Construction Products, agrees with ACC’s expectation that the residential and commercial building markets should continue to grow this year in the U.S. On the other hand, he says, demand for construction chemicals such as concrete additives and building materials such as waterproofing membranes will slow in the weaker Latin American economies of Venezuela, Argentina, and Brazil.

Although China’s growth has slowed to the high single digits from the double-digit rates of a few years ago, that country’s appetite for construction materials is “holding up well,” Petti says. “We’re still investing in China. We see more construction there than anywhere else in the world.”

Meanwhile, the outlook for the paint and coatings industry will be rosy if the price of the oil and gas used to make raw materials stays low, says Phil Phillips, president of the advisory firm Chemark Consulting Group. “Margins are healthy now for paint makers,” he says. Phillips expects the U.S. market for coatings used in industrial maintenance, infrastructure, and new construction to grow by 3–5% in 2015.

However, for Keith Olesen, field marketing manager at the acrylic coating resins supplier Arkema, lower oil prices aren’t much help. The U.S. petrochemical industry’s shift in recent years to lighter feedstocks means it is producing less propylene, which Arkema uses to make acrylic acid. So propylene has become expensive, and profits in his business are suffering, Olesen says.

In addition, global demand for coating resins will increase tepidly as economic activity slows in China and Europe heads for a possible recession, according to Olesen. He expects the slowdown to be temporary, but he isn’t holding his breath as he waits for robust growth to resume.—Marc Reisch

Last year brought a surge of deals from big pharmaceutical companies and record-high transaction volume from specialty pharma and generics firms. Industry experts expect merger-and-acquisition (M&A) activity in 2015 to be just as intense.

“With reloaded cash balances, a stable-to-improving outlook for earnings growth, and historically low [interest] rates, we expect a continued aggressive M&A stance across the group,” Leerink stock analyst Seamus Fernandez told investors recently.

Some M&A activity in 2014 was driven by so-called inversions, deals where the buyer targets a company based in a country with low taxes. Pfizer’s failed pursuit of AstraZeneca and AbbVie’s abandoned bid for Shire were both motivated in part by the potential for tax savings.

But last fall, the U.S. government tightened the tax code, and industry watchers expect deal-making in 2015 to return to its usual focus on strategic fit. They also note that big pharma’s definition of “strategic fit” is getting narrower: Drugs that offer incremental improvements over existing therapies aren’t seeing the steady sales of the past, so firms are trying to focus instead on therapeutic areas where they can dominate through innovation, according to Patrick Flochel, head of pharmaceuticals at the consulting firm Ernst & Young.

The desire for therapeutic focus is driven in part by a more abbreviated life cycle for new drugs. In the past, companies could reasonably expect a solid decade of sales for a drug before it was supplanted by generics. Now, as insurance and other payers get tougher about what they are willing to cover, a new phenomenon has emerged. “Drugs that have been launched quite recently are all of a sudden trumped by a better drug for the same thing, and it’s the end of growth for that drug,” Flochel says.

For example, Vertex Pharmaceuticals and Merck & Co. were lauded in 2011 when they each launched an innovative treatment for hepatitis C virus (HCV). But the approval of more effective drugs from Gilead Sciences has already rendered the Vertex and Merck products obsolete. And although Gilead’s HCV treatments aren’t expected to go away, their lofty sales should become more earthly following the approval last month of a new HCV pill from AbbVie. Flochel expects to see more swift rises and falls in the coming years.

This year could also bring more pressure from activist shareholders who are pushing companies to cut costs and improve R&D efficiency, notes Jeff Greene, head of life sciences transaction advisory services at Ernst & Young. In fact, an Ernst & Young survey found that two-thirds of biopharmaceutical executives expect to see an increase in hostile M&A in 2015.—Lisa Jarvis

Although 2014 was a standout year for several renewable chemicals and fuels companies, competition from synthetics derived from cheap oil is likely to dampen enthusiasm for new projects this year. Still, experts don’t expect this pause to mark a downturn in demand for petroleum alternatives in the long run.

Last year’s cleantech highlight was undoubtedly the start-up of two commercial-scale cellulosic ethanol facilities in the U.S. First was September’s grand opening of Project Liberty, a joint venture in Emmetsburg, Iowa, between corn ethanol producer Poet and Dutch specialty chemical company DSM. October brought the start-up of a similar plant in Hugoton, Kan., by Spanish energy firm Abengoa.

If the cellulosic ethanol pioneers successfully scale up production, they may pave the way for a second wave of capital investment, but that is unlikely to happen soon. Factors outside their control are not favorable: Traditional fuel costs are down, and demand for transportation fuel is flat.

What’s worse, the Obama Administration has delayed decisions about the quantity of biofuels that fuel blenders are required to purchase under the Renewable Fuel Standard. The potential for RFS minimums to be lowered is “very unfortunate,” says Brent Erickson, who heads the industrial and environmental section of the Biotechnology Industry Organization, a trade group. “It really hits cellulosic biofuels harder than conventional ethanol.”

Last year was also supposed to be a big year for so-called drop-in biofuels. But leading contender KiOR, which had financial backing from famed venture capitalist Vinod Khosla, was unable to reach commercial-scale production of gasoline and diesel from wood. It instead filed for bankruptcy.

This year the project to watch will be in Edmonton, Alberta, where Enerkem has commissioned a large-scale municipal-waste-to-chemicals facility. The plant will first produce methanol and begin making ethanol in 2016, according to Timothy J. Cesarek, the company’s head of business development. “I see 2015 being a very good year for us,” he says. “A lot of that is driven by our ability to provide a solution for the waste industry as well as for the chemicals industry.”

Meanwhile, other biobased chemicals, such as biosuccinic acid and plant-based polyethylene terephthalate, will be hit hard by lower oil costs this year, cautions Meraldo Antonio, an associate at Lux Research.

However, lower energy and raw material prices are good for the larger chemical industry and may have a trickle-down effect on some renewables projects, Antonio says. If leaders such as BASF, Dow Chemical, and DuPont are financially healthy, they may be willing to direct some of their profits toward alternative chemicals and materials.—Melody Bomgardner

Buoyed by strong demand for digital displays and mass production of a new generation of microchips, makers of electronic materials anticipate a solid performance in 2015.

Last year was already positive for companies, with leading players such as Dow Chemical, Shin-Etsu Chemical, and JSR enjoying strong growth. For instance, JSR posted a 32% increase in sales of semiconductor materials in the first half of the fiscal year that ends March 31.

This year will also be expansionary, according to JSR President Mitsunobu Koshiba, because the chip industry will shrink circuit lines from 20 nm to 14 nm. Increasing circuitry fineness translates into higher demand for specialized materials, he says.

“Demand for electronic materials for semiconductors could increase by 40%” in 2015, Koshiba says. “It’s not that the number of silicon wafers being processed will increase by that much but rather that processes are getting more complicated, which leads to more layers applied.”

Demand for display materials will be strong as well but for different reasons, Koshiba says. Consumers worldwide are buying high-definition TVs, and producers of flat-panel displays are running at full capacity. “Even producers that until recently were unprofitable are now profitable,” he says. But consumer demand is fickle, he notes, and could weaken anytime.

And strong demand does not always translate into higher profits for electronic materials producers, warns Yang-jer Yeh, a senior industry analyst at Taiwan’s Industrial Technology Research Institute. In the case of new materials, firms must recover R&D costs before they can book a profit.

Even after they have recovered their R&D expenses, electronic materials producers don’t necessarily enjoy bumper profits because prices for their wares are constantly decreasing. Between 2001 and 2014, falling prices actually caused the market to shrink.

Nonetheless, Yeh expects 2015 will be a reasonable year for the industry, especially in the second half when mass production of 14-nm chips kicks in. But companies that produce older materials will suffer from poor pricing and growing competition from China, he adds.

JSR’s Koshiba agrees that competition in electronic materials is intense, often at the expense of profitability. Nonetheless, he is positive about the outlook, even beyond 2015, for companies that offer innovative materials and quickly amortize R&D expenses.

The need for innovation will continue. Between 2012 and 2020, Koshiba expects, consumers will expand the amount of data they consume by a factor of 12. This jump will require a tremendous increase in data storage and processing capacity, which means more microchips, and more powerful ones.—Jean-François Tremblay

It would seem that optimism has broken away from caution in the fine chemicals sector. If last year’s outlook leaned toward enthusiasm, this year’s has a hint of ebullience. In a sector known for marked cycles, the current upswing has a sustainable quality.

“A lot of people are really thinking we’ve turned the corner,” says James Bruno, president of the consulting firm Chemical & Pharmaceutical Solutions. “Production is booked through the first half of the year, and capacity seems tight. It’s a glowing, glowing report.”

Although the fine chemicals sector is impacted by macroeconomic trends, it is primarily driven by the fortunes of customers in the drug industry. Sources agree that a significant uptick in drug approvals in recent years has energized sales, as has a shift in pharmaceutical company sourcing back to Europe and the U.S. as costs and quality concerns chip away at the Asian advantage.

More important, a two-year round of downsizing in drug industry production capacity has increased the demand for contract-manufactured pharmaceutical chemicals and made outsourcing, heretofore an opportunistic strategy for most major drug companies, a routine means of supply.

“All the trends are in our favor,” says Aslam Malik, president of Ampac Fine Chemicals. “The industry has a very healthy pipeline of Phase III drugs, which is what drives the fine chemicals business mainly.”

Malik notes that Food & Drug Administration fast-track approval of new products, especially in oncology, will likely create a lot of business this year. “A lot of times, a drug goes right into Phase III before you even know about it. And it’s like, wow!”

Ampac’s sales grew by more than 20% in 2014, according to Malik. “Any time you go into double digits, that’s good,” he says. “But when you go into double digits that start with a two, that’s even better.”

Guy Villax, CEO of the fine chemicals maker Hovione, is similarly sanguine about prospects for 2015. “We are currently ahead of budget with a robustness we didn’t have before,” he says, noting that others in the sector are saying the same thing. “It looks as if the market is great, and I think it’s across the board. No particular segment is doing better than another.”

Cambrex also expects a strong 2015, according to Chief Operating Officer Shawn P. Cavanagh. “The custom manufacturing pipeline is as healthy as it has been for quite a while,” he says. Cambrex received a huge boost from a single contract in 2012. But Cavanagh says growth these days is attributable primarily to improvement in business development, quality, and project execution.

“You probably have to lump me in with the optimistic crowd,” he says.—Rick Mullin

The laboratory and analytical instrumentation business didn’t break records in 2014, but it did look brighter after a tough 2013. And 2014’s 3% growth rate should continue in 2015, according to Christi Bird, senior analyst with the research firm Frost & Sullivan. Biotech and pharma markets, along with niches such as food testing, will remain better prospects than industrial sectors.

Pent-up demand has been the key driver in the U.S., particularly in academic and government markets that had to delay or forgo equipment purchases in 2013 because of government sequestration. The U.S. and Europe account for most instrument sales, and “those economies are still in recovery mode,” Bird says. One uncertainty is whether pent-up demand has run its course.

Luckily for many instrument makers, consumables make up more than half their sales. This more stable segment grew at about 3.4% in 2014 and should continue to do well. “Most growth is coming from life sciences reagents and kits,” Bird says, and is being fueled by a rise in molecular biology work in applied markets as well as in traditional academic and government ones.

Instrument firms are optimistic about the year ahead. Agilent Technologies predicts that its core business will grow 4% to about $4.2 billion in 2015. Its forecast is based on expectations for a gradually improving economic environment in the middle of the year and continued adoption of technologies with better performance.

U.S., Chinese, and Indian markets should get stronger, while markets in Western Europe, Brazil, and Japan will stay somewhat weak, according to Mike McMullen, Agilent’s chief executive officer-elect. After splitting off its electronics measurement business in late 2014, Agilent reorganized around life sciences and applied markets, diagnostics and genomics, and services and consumables.

Likewise, PerkinElmer focuses on the environmental, diagnostics, and life sciences sectors. “We have nice growth prospects across the board,” CEO Robert F. Friel told investors in late 2014. “Macro indicators would imply that the diagnostics business continues to do quite well.”

Indeed, the rapidly growing diagnostics business has become a target for many instrument makers. At Illumina, sales of next-generation sequencing (NGS) systems and related consumables were up 30% in 2014. “We are well positioned for continued long-term growth as we develop and address the large and untapped market opportunities ahead,” CEO Jay Flatley says.

Likewise, Thermo Fisher Scientific moved further into diagnostics with recent U.S. and European clearances for clinical use of its NGS systems. Integrating the Life Technologies acquisition and improving cash flow in 2014 have helped position the company for a strong 2015, according to CEO Marc Casper.—Ann Thayer

Specialty chemicals will grow a bit faster than the overall economy this year with bright spots including cosmetic ingredients and catalysts for plastics. However, specialty chemicals used for extracting oil and gas may suffer in the face of the current energy glut.

In a 2015 outlook report, economists at the American Chemistry Council project that U.S. production of specialties will benefit from strong markets including automobiles, appliances, and passenger jets. They expect U.S. specialty chemical output to increase 4.6% in 2015 compared with the year earlier, following a 3.8% increase in 2014.

Global demand for specialties will be strong too, although not as strong as in the U.S. ACC projects world specialty chemical production will increase 4.2% after growing 3.6% in 2014. The group figures that both the U.S. and world economies will expand by 3.0% in 2015.

Growth trends are favorable for polyolefins, notes Al Beninati, president of Grace Catalysts Technologies. Thanks to population growth and increased consumption in emerging economies, demand for polypropylene and polyethylene will expand at an average rate of 5% per year. Demand for polyolefin catalysts should rise accordingly, he says.

The recent drop in crude oil prices should have no significant effect on sales of catalysts to oil refineries, at least in the short term, Beninati says. In fact, he points out, lower oil prices portend healthy demand for fuels and the catalysts needed to refine them.

But demand for thickening agents and drilling sands used in the hydraulic fracturing process for extracting oil and gas may suffer as oil prices drop, notes Ray K. Will, a director at market research firm IHS Chemical. U.S. oil companies will likely delay new projects as long as oil prices are low, he says.

On the other end of the specialty chemical spectrum, makers of antiaging cosmetic ingredients will continue to see growing demand for their elixirs, says Nikola Matic, industry manager at the consulting firm Kline & Co. He predicts antiaging ingredient demand will grow 5% in 2015, faster than growth for cosmetic ingredients overall, which he expects will be between 3% and 5% in mature markets such as the U.S. and Europe.

Consumers, Matic predicts, will be increasingly critical of cosmetics that boast about natural ingredients when they in fact contain mostly synthetics. Expect consumers to pay more attention to product labels this year, he says.—Marc Reisch