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Business

Chemical Outlook 2016 By Market

by Business Department
January 11, 2016 | APPEARED IN VOLUME 94, ISSUE 2

Signs point to 2016 being another strong year for making petrochemicals in the U.S.

COMING STORM
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Credit: LyondellBasell
LyondellBasell’s La Porte, Texas, plant is one of many that are expanding.
Credit: LyondellBasell
LyondellBasell’s La Porte, Texas, plant is one of many that are expanding.

After a collapse in oil and natural gas in 2014 and 2015, energy prices are stabilizing. According to the U.S. Energy Information Administration, oil prices averaged about $49 per barrel in 2015, a nearly 50% drop from the year before. EIA forecasts they will inch up to $51 in 2016.

Natural gas prices also have been declining, although not by as much. They averaged $2.67 per million Btu in 2015, a 40% decrease from the year before. EIA expects them to recover to $2.88 this year.

U.S. companies make petrochemicals from natural-gas-derived ethane rather than the petroleum-based naphtha used in much of the rest of the world. Fed by cheap shale gas since the late 2000s, U.S. firms have been making more money than their foreign rivals.

The decline in oil prices has eroded some of that advantage. But as Bhavesh V. (Bob) Patel, chief executive officer of LyondellBasell, pointed out in a presentation to investors last month, oil is still about two-and-a-half times as expensive as natural gas on an energy content basis. This, he said, is “very favorable to ethylene and polyethylene production” in the U.S.

Looking ahead at petrochemical market conditions, Mike Smith, vice president of light olefins for the consulting group Argus Media, says the New Year will begin with a bang. By April, he expects, some 12% of U.S. ethylene capacity will be down for scheduled maintenance. This is “very significant,” he notes, given that the industry has been running its plants at already-high 92% operating rates.

The outages will put upward pressure on prices, Smith says, but the market should ease by the second half of 2016. Braskem is opening an ethylene cracker and polyethylene plant in Mexico, that should displace some of the U.S. polyethylene that has been entering the country. Also, Lyondell, Dow Chemical, and Westlake Chemical are starting up expansions that together amount to about 725,000 metric tons of ethylene capacity, a 2.5% increase for the U.S.

In propylene, Dow and Enterprise Products will open a pair of propane dehydrogenation plants that will boost overall propylene capacity by 11% and bring output of that building block to its highest level since 2007, Smith says.

These expansions are the first few thunderclaps of an approaching U.S. capacity storm. More than a dozen petrochemical makers are planning ethylene crackers over the next half-dozen years.

Don’t worry, Lyondell’s Patel assured: No one is building much capacity anywhere else. “The world needs about five new crackers annually to meet growing demand,” he said.—Alex Tullo

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Agriculture: Fine Weather For Consolidation

SEEDS OF CHANGE
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Credit: Aloxe/Wikimedia Commons
DuPont’s Pioneer, a leading corn seed producer, will become part of the giant DowDuPont combination.
Credit: Aloxe/Wikimedia Commons
DuPont’s Pioneer, a leading corn seed producer, will become part of the giant DowDuPont combination.

While El Niño warms a mass of water in the Pacific Ocean, merger talks brew at major producers of agricultural chemicals and seeds. The firms are, to some extent, victims of their own success. The widespread adoption of high-yielding seeds—particularly corn and soybeans—plus two years of favorable weather have resulted in bumper crops and low prices.

Low crop prices, in turn, mean farmers have less money to spend on pricey, multiple-trait seeds and patented crop protection chemicals. The U.S. Department of Agriculture estimates that farm income dropped more than one-third last year. Analysts expect price pressure to continue in 2016.

As 2015 came to a close, chemical company executives were openly looking to strike agriculture deals that would help offset their pricing problems. One that happened is the combination of Dow Chemical and DuPont, which will create a megafirm with combined agriculture sales of $19 billion per year and potentially set off a chain reaction of more deals.

Big chemical companies had invested heavily in agriculture to access a growth market. Population increases and rising wages around the world promised to drive demand for food. But developing new chemicals and seed traits costs billions of dollars, and profits have been elusive.

By buying out rivals, the companies can trim research investments and create sales synergies. More large combinations may follow, and smaller acquisitions are likely as DowDuPont sells overlapping businesses. “We’ll be waiting to see how the antitrust process shakes out,” says Vijay Sarathy, a partner at the consulting firm PricewaterhouseCoopers. “There are lots of combinations that are possible.”

The launch of DowDuPont takes two businesses off the table while putting pressure on others to bulk up, according to Thomas Gilbert, an analyst at the investment bank UBS. In a research note, he writes that antitrust rules could limit the options available to the rest of the big players, which include BASF, Bayer, Monsanto, and Syngenta. Syngenta’s board is reportedly in talks with both Monsanto and China National Chemical; both had earlier made offers that were rejected.

But probably no one is more concerned about competition—or the lack of it—than farmers. National Farmers Union President Roger Johnson is worried that the merger means the “big six” companies will become five—and maybe four. “The standard against which to measure any merger is whether it will increase competition in the marketplace, and almost certainly this merger will leave us with much less, not more, competition,” he says.—Melody Bomgardner

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Pharmaceuticals: Innovation To Continue, As Will The Spotlight On Pricing

BREAKTHROUGH
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Credit: Newscom
This year is expected to see follow-ups to 2016 hits such as Harvoni, a hepatitis C drug from Gilead.
Credit: Newscom
This year is expected to see follow-ups to 2016 hits such as Harvoni, a hepatitis C drug from Gilead.

Prospects are bright for the pharmaceutical sector in 2016. The industry is enjoying record-high drug approval rates, there’s strength in pipelines across the board, and global demand for drugs is steadily increasing. Pressure on prices will also carry over into 2016, however, continuing a tension between innovation and access that characterized the sector last year.

The one big difference is that 2016 is a general election year in the U.S. Drug pricing has already surfaced as a target, especially for the leading Democratic candidates for the presidency, Hillary Clinton and Bernie Sanders, who picked up on news last year about huge drug price hikes implemented by Martin Shkreli, former chief executive officer of Turing Pharmaceuticals.

John LaMattina, senior partner at the health care venture firm PureTech and former head of research at Pfizer, sees the industry’s reputation, already tarnished over drug pricing, set for a further drubbing in 2016. “Pharma is an easy target. And the Martin Shkrelis of this world are not helping matters,” he says.

Given the lack of sympathy for the industry at the moment, the focus on pricing will continue to eclipse advances made in introducing important new drugs, LaMattina predicts. Indeed, 2015 was a banner year in which the Food & Drug Administration reported 44 new approvals by late December compared with a total of 41 in 2014.

LaMattina sees little indication that the run of new drugs will slow in 2016. “A lot of R&D investments made 15 years ago, especially in genomics, and investment in rare diseases and cancer are paying off big-time now,” he says.

Bernard Munos, founder of the InnoThink Center for Research in Biomedical Innovation and a former R&D adviser to Eli Lilly & Co., agrees. “I think the industry has turned a corner,” he says. “Not only will we see more drugs, but we will see better drugs.” Therapies for cancer and inflammation are “heads and shoulders above what we saw a decade ago,” he says.

Early-stage pipelines are also strong, Munos points out, ensuring that recent success “is not just a flash in the pan.” The innovation engine is well-fueled, and gene editing is showing great promise in treating rare disease. “It will be the source of multiple drugs per year once FDA becomes comfortable with it,” he predicts.

Propelled by Pfizer’s pending acquisition of Allergan, mergers and acquisitions activity is likely to continue strong in 2016, according to Jeffrey R. Greene, head of life sciences transaction advisory services at Ernst & Young. Large drug companies will pursue deals to bolster sales, he notes. And large biotech firms with money to spend may do so this year.—Rick Mullin

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Cleantech: Strong Signals For Renewable Energy, Storage

SOLAR TOWER
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Credit: Amble/Creative Commons
The 110-MW Crescent Dunes Solar Energy Project, near Las Vegas, stores thermal energy in molten salt.
Credit: Amble/Creative Commons
The 110-MW Crescent Dunes Solar Energy Project, near Las Vegas, stores thermal energy in molten salt.

A quiet revolution in the energy market happened between 2010 and 2015: The average global cost of new utility-scale photovoltaic power decreased by two-thirds, according to the International Energy Agency. Onshore wind power is still cheaper, but solar costs are dropping more rapidly and are expected to fall an additional 25% through 2020.

The era of waiting for “grid parity” is over. Long-term supply contracts and price hedging make wind and solar power competitive with gas and coal. Now the watchword in renewables is commitment. The Paris climate agreement, the Clean Power Plan in the U.S., and China’s vows to tackle air pollution, among other moves, show this commitment gathering strength.

“Even in a lower fossil-fuel price environment, the policy drivers for renewable electricity—energy diversification, local pollution, and decarbonization aims—remain robust. And some key countries, such as China and India, have bolstered their deployment ambitions going forward,” an IEA report says.

This year, strong demand for renewable energy will favor deployment of already-proven solar and battery technologies, says Cosmin Laslau, an analyst at Lux Research. Indeed, photovoltaic installations in the U.S. could nearly double to 41 gigawatts between the fourth quarter of 2015 and the end of 2016, according to the Solar Energy Industries Association, a trade group.

But new technologies will need to be deployed so that utilities can manage the expected fluctuations in energy generated by scattered wind and solar sources. The five-year expansion of the solar investment tax credit in last month’s budget deal only increases the pressure.

Energy storage and battery management technologies will need to rapidly scale to handle the timing difference between renewables generation and peak energy demand, Laslau points out. Industry will invest in better technology for mass production of lithium-ion batteries. Venture investors will look for opportunities in next-generation technologies such as sulfur-air batteries, which are still years from commercialization.

One barrier to wide adoption of electric cars has been high battery prices. But this year, Tesla and its partner Panasonic, along with other large producers, will implement new manufacturing technologies to bring down costs. Materials innovations—to make batteries smaller and longer-lasting—will appear first in mobile devices, and will later migrate to vehicles.—Melody Bomgardner

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Electronic Materials: Customers Will Demand Lower Prices

CONSOLIDATION
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Credit: Merck KGaA
In 2014, Merck KGaA acquired the semiconductor materials supplier AZ Electronic Materials.
Credit: Merck KGaA
In 2014, Merck KGaA acquired the semiconductor materials supplier AZ Electronic Materials.

Companies that supply materials to the electronics industry will struggle in 2016. Demand will grow slowly, and manufacturers of semiconductors and displays, each for their own reasons, will push for lower materials prices.

Global demand for silicon wafers, the semiconductor building block, will grow by about 3% in 2016, predicts Mark Thirsk, partner at the electronic materials research firm Linx Consulting. It’s not a lot of growth, and it will affect materials makers.

At one end of the market, suppliers of materials for mature products, such as computer chips cut from 200-mm-diameter silicon wafers, will face declining demand. At the other end of the market, suppliers of materials used for making more advanced chips fabricated on 300-mm-diameter wafers will enjoy growth as high as 7%.

But profitability will be tempered by demands from chip makers for price reductions as high as 30%, Thirsk says. Materials have become a cost-cutting target because the manufacture of chips with thinner circuit lines requires more steps and more chemicals such as photoresists, dielectrics, and thin-film precursors.

Mergers and acquisitions could be a theme in 2016, Thirsk adds, as materials suppliers look to spread R&D costs over a larger business. Deals between Western companies, such as the 2014 acquisition of AZ Electronic Materials by Merck KGaA, have already happened. In the future, Chinese companies will likely be buyers of Western ones, Thirsk anticipates.

In display materials, weak market conditions are a problem, according to Tadashi Uno, a senior analyst at the market research firm IHS Technology. In October, the world’s largest liquid-crystal-display panel maker, LG Display, reported a 30% drop in profit. It has gotten worse since.

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“All panel makers were in the red in December, so there is a lot of pressure to reduce costs,” Uno says. Because televisions require more display materials than mobile phones or personal computers, it’s the TV market that matters to chemical companies, Uno notes. And fewer TVs will be sold in 2016 than in 2015, he expects.

Technology trends in the display industry will not necessarily favor materials companies, Uno adds. For instance, he notes that Nitto Denko has come up with a new way to coat polyvinyl alcohol films in display polarizers that improves polarizer luminescence while significantly reducing film requirements.

On the other hand, Inese Lowenstein, head of Merck’s display materials business, sees opportunity in trends such as curved and flexible displays, high-dynamic-range displays, and enhanced color gamut displays. Lowenstein says Merck’s full acquisition in 2015 of the quantum dot supplier Qlight Nanotech should help the firm capitalize on such trends.—Jean-François Tremblay

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Fine Chemicals: Bullishness To Prevail For Another Year

EXPANSION
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Cambrex already has customers for capacity it will add in Charles City, Iowa.
Cambrex already has customers for capacity it will add in Charles City, Iowa.

The pharmaceutical chemicals sector is, if anything, more optimistic about 2016 now than it was about 2015 last year at this time. With their fortunes tied to those of a pharmaceutical industry on a sustained roll of new drug approvals, contract manufacturers of active pharmaceutical ingredients (APIs) and drug intermediates say they see no end to solid—in many cases double-digit—sales growth in the year ahead.

Many are seeing past investments in specialized technologies and services, such as facilities for making highly potent APIs, gain traction as a new breed of drugs come forward. And many continue to invest.

“There is only one word to describe it,” says Aslam Malik, president of Ampac Fine Chemicals, of the year ahead, “and that is ‘outstanding.’ ” Malik sees continued investment in the pharma sector and an uptick in new projects as drug programs move through development and near the market. “The fundamentals are really good,” he says. As such, Ampac, which completed a capacity expansion in 2015, plans another capacity build-out for this year.

Cambrex is in a similar situation. “We continue to see fairly robust growth,” says Shawn Cavanagh, chief operating officer of the New Jersey-based contract manufacturer. The company is expanding production at its Charles City, Iowa, facility, he says. “A portion of that is spoken for, and it’s not even finished yet.”

Among its customers Cambrex counts Gilead, a fast-growing drugmaker with several new products, including treatments for hepatitis C, on the market. But Cavanagh claims that Cambrex is not dependent on any one customer’s business, adding that large products tend to tie up capacity that the firm needs to have at the ready.

James Bruno, president of the consulting firm Chemical & Pharmaceutical Solutions, is also bullish on 2016. “It should be a great year for everybody unless you really screw up royally,” he says. “And I assume that will carry over into 2017.”

The key barometer, Bruno says, is the new drug pipeline, where the biotech sector shows increasing strength. “The biotech market will continue to be strong. There are a lot of venture capital people investing. Big pharma doesn’t have a pipeline, so you have to go to the little guy.”

Roger LaForce, an industry consultant based in Switzerland, says European fine chemicals firms are looking forward to an excellent year, and many are investing in new capacity. “I think it would be a good idea to prepare for the future,” he says, noting that the technology landscape is changing and that more specialized chemistry is being sought. “There are antibody-drug conjugates, and even oligonucleotides, on the horizon, as well as peptides,” LaForce says.—Rick Mullin

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Instrumentation: Optimism Returns Across Most End Markets

UNDER PRESSURE
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Credit: Business Wire
Thermo Scientific’s EASY-nLC 1200 system is designed for high-throughput proteomics applications.
Credit: Business Wire
Thermo Scientific’s EASY-nLC 1200 system is designed for high-throughput proteomics applications.

Prospects look good for the nearly $46 billion laboratory and analytical instrumentation business this year. Aggregated figures from suppliers and analysts peg overall market growth at about 4.5%.

Heading into 2016, Goldman Sachs stock analyst Isaac Ro sees “multiple reasons to be more constructive” about the outlook. At the same time, macroeconomic challenges—the Chinese economy, foreign exchange rates, and energy prices—will insert a bit of uncertainty into the instrumentation business.

On the upside, biopharma R&D spending should accelerate modestly, and academic funding could turn positive this year, Ro predicts in a recent report to clients. He also expects the National Institutes of Health budget, which is the single largest source of government money for the industry, to grow as much as 7% if the current budget bill passes. And the European Union’s Horizon 2020 research and innovation program should stabilize funding in Europe.

Japan is another story. “A significant headwind in the short term is Japan’s deteriorating economy as funding delays are causing very weak academic and government spending,” PerkinElmer Chief Executive Officer Robert F. Friel noted late last year. “There’s hope for recovery in 2016.”

Instrument company executives are most bullish about pharma R&D. Although drug pricing is a “political hot potato,” pharmaceuticals will continue to be a “good, solid end market” as long as drugs are getting approved, Thermo Fisher Scientific CEO Marc N. Casper said when reporting results in late 2015. Likewise, Waters CEO Christopher J. O’Connell touts growth from specialty pharma, biotech, and contract research firms.

Meanwhile, industrial applications should remain resilient, Ro said, especially as spending shifts away from cyclical markets and toward applied areas such as environmental and food testing. Most instrument providers have limited exposure to energy-related markets and could even see a boost if the chemical sector grows because of low oil prices.

Low energy prices put pressure on economic growth in some emerging markets, such as Brazil and Russia. At the same time, instrument suppliers are cautiously optimistic about China’s continued investment in R&D. In 2016, Ro estimates, China will drive about 10% of sales and 11% of growth in the tools market.

Instrumentation is tied directly to China’s long-term priorities, PerkinElmer’s Friel pointed out. “The government’s focus on ensuring a cleaner environment, safer food, and overall access to health care will hopefully translate into positive impacts for both local funding and China’s next five-year plan,” he said.—Ann Thayer

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Specialties: Another Good Year Is Expected

TOTALLY TUBULAR
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Credit: Shutterstock
Expect greater use of reverse-osmosis membrane desalination systems as freshwater shortages grow.
Credit: Shutterstock
Expect greater use of reverse-osmosis membrane desalination systems as freshwater shortages grow.

The outlook for specialty chemicals in 2016 is bright, according to the American Chemistry Council. The trade association expects specialties production to rise 3.9% globally in 2016 after a 3.8% increase in 2015.

In the U.S., rising consumer spending on cars has been a definite plus for specialty chemicals, points out Ray K. Will, a director at market research firm IHS Chemical. As a result, demand is growing for a host of specialties such as mobile air-conditioning refrigerants, plastic additives, and specialty lubricants.

The continuing oil glut and corresponding low price of fuel has helped propel growth in car and sport-utility vehicle sales. But low energy prices have prompted the oil drilling sector to trim its use of hydraulic fracturing, or fracking, which uses copious amounts of water treatment and other chemicals to extract hydrocarbons from underground wells.

Demand for fracking water treatment chemicals has slipped “significantly” from a high point just a few years ago, says Colin Frayne, a consultant at water chemical advisory firm Aquassurance. Still, he predicts that the much larger industrial and drinking water treatment market will grow between 5 and 7% worldwide in 2016.

One bright spot, Frayne says, is the need for chemicals to treat water for cooling towers that chill computer equipment at data processing farms. In addition, global shortages of water for drinking and industrial use will mean greater emphasis on desalination, water recycling, and rainwater capturing techniques. He anticipated mounting reliance on water treatment chemicals and reverse-osmosis membrane filtration systems to make those techniques safe and practical.

A robust automotive market is also helping push up demand for high-performance structural adhesives by some 5.5% annually, says Phil Phillips, president of Chemark Consulting. Rising use of such adhesives—including epoxies, urethanes, silicones, and cyanoacrylates—also comes from improving markets for housing and electronics, he says.

Increased car sales, low fuel prices, and good economic growth bode well this year for catalysts used in refineries, according to Al Beninati, president of Grace Catalysts Technologies. He predicts demand will increase by about 2% in the U.S. and a little higher globally.

Polyolefin catalyst demand will grow in the low single digits in 2016, Beninati predicts. Demand will be especially strong in the U.S., where low feedstock prices prevail. Automotive demand for plastic components will account for some of that growth, but a more significant driver will be the need for packaging materials, particularly in emerging markets, he says.—Marc Reisch

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