Chemicals outlook 2008: Global demand means higher prices
Eager to relieve margin pressures from higher oil rates, chemical producers will pass along their added cost burdens this year. But long-term predictions show increased global capacity alleviating buyers' woes.
By Gordon Graff -- Purchasing, 1/17/2008 2:00:00 AM
Prices of most chemicals moved up in 2007 in response to the giant leap in oil prices and chemical buyers in 2008 can expect further, though modest, price increases, especially if the U.S. economy gets back on its feet and producers seek to boost their margins.
While the price increases of 2007 were difficult to swallow, according to some chemical industry economists, they were less extreme than they could have been, mostly due to depressed U.S. demand for chemicals and their downstream products. That slackening chemicals demand has been due mostly to the struggling housing market and the sub-prime mortgages market, as well as more expensive gasoline and home heating oil.
In the short-term, an economic recovery would push prices up further, but in the 2009–2011 timeframe, market experts say a flood of new petrochemical feedstocks and supply from the Middle East could send chemical prices on a downward trajectory. Looking at demand, the domestic chemical industry has certainly taken a hit recently. Right now "housing is in free fall, and I don't think we've seen the end of that yet," says Kevin Swift, the chief economist for the American Chemistry Council (ACC), an Arlington, Va.-based chemicals industry trade group. The automotive industry is also depressed, which reduces chemical demand, he notes, which combined put a major damper on demand last year. According to Swift's calculations, each housing start consumes nearly $17,000 worth of chemicals and plastics, while each new automobile absorbs more than $2,400 of chemical products. So the downturns in these sectors are making a big dent in chemical makers' profits, putting more pressure on them to increase prices for the chemicals they are selling to recoup their own escalating energy, fuel and feedstock costs.
Exports booming
What is keeping the U.S. chemical industry afloat and kept suppliers from disappearing from the U.S. market, says Swift, is robust exports of chemicals to overseas buyers. In fact, the U.S. chemical industry had a foreign trade surplus in 2007 for the first time since 2001. The weaker dollar against the Euro, Swift explains, has made chemical products made in the U.S. economically attractive to overseas buyers.
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Exports from the U.S. are also being bolstered by the fact that "the chemical business is pretty good in Asia," says Frantz Price, a petrochemicals analyst with Global Insight in Lexington, Mass. Moreover, he notes that many basic chemicals derive from ethylene, which is manufactured in the U.S. mostly from natural gas. Because natural gas hasn't risen in price nearly as much as oil, many U.S. chemical producers can sell their products overseas more cheaply than foreign rivals, who typically use ethylene feedstocks derived from oil.
Despite healthy exports, the slump in the U.S. chemicals market has made it difficult for chemical manufacturers to pass along all of their increased energy and raw materials costs to chemical buyers in the U.S. Pass-alongs have been a problem for Rohm and Haas, for example. In a recent year-end review, the company says it incurred some $60 million more in raw materials costs in the fourth quarter of 2007 than in the same period a year earlier, but expects to recoup $10 million of this through price increases. During the first quarter of 2008, Philadelphia-based Rohm and Haas says it hopes to recover 80% of its raw materials cost escalation through higher prices.
While greater demand after a period of stagnation usually makes it easier for companies to play catch-up in their pricing, petroleum tags are still the most important factor in pricing decisions. And in 2008, oil will probably come down from its recent astronomical levels, says Price, "although it may bounce back up from time to time."
Purdue University agricultural economist Alan Miller predicts that chemical prices will advance by anywhere from 2–6% in 2008 because natural gas prices are likely to average 9% higher in 2008 than in 2007, which will "prop up" prices of ammonia and other nitrogen fertilizers.
The most important factor in the long-term chemical pricing situation is a host of giant petrochemical complexes that are now planned or under construction in the Middle East and the Far East. The Middle East plants, for example, will more than double that region's petrochemical capacity, according to a recent study by ChemSystems in White Plains, N.Y.
Price says the excess capacity, "will bring chemical prices down all over the world, including in the U.S."
Chemical price increases depend on demand increase
How far and fast chemical companies can boost prices in 2008 will depend on how much demand improves. Modest gains in demand are in the cards for 2008, according to American Chemistry Council projections. The group estimates that for the chemical industry as a whole, revenues will advance by 2.1% in 2008 over the previous year, compared to 1.3% in 2007.
Looking at specific sectors, specialty chemicals, which saw revenues decline in 2007, will grow in 2008, as will the market for agricultural chemicals. Plastic resins saw moderate growth in 2007 and will increase its revenue growth in 2008.
The upturn won't extend to all segments. Several will show slower growth in 2008, including inorganic chemicals, and bulk petrochemicals and organics. The greatest gains in chemical demand will occur during the second half of 2008, according to the ACC.
| Est 2007 revenue | Est 2008 revenue | |
| Source: American Chemistry Council estimates | ||
| Specialty chemicals | Down 1.3% | Grow by 0.9% |
| Agricultural chemicals | Down 5.7% | Grow by 1.8% |
| Plastic resins | Grew 1.9% | Grow by 2.5% |
| Chemical industry | Grew 1.3% | Grow by 2.1% |
Disadvantage: chemical buyers
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