Cheap
oil feedstocks, the weakened U.S. dollar and a plant utilization rate
approaching 90 pct will propel the streamlined U.S. petrochemical
industry to record profits this year, with growth expected through at
least 1990, major company executives predicted. This bullish outlook for
chemical manufacturing and an industrywide move to shed unrelated
businesses has prompted
GAF Corp (
GAF), privately-held
Cain Chemical Inc, and other firms to aggressively seek acquisitions of petrochemical plants. Oil companies such as
Ashland Oil Inc (
ASH), the
Kentucky-based
oil refiner and marketer, are also shopping for money-making
petrochemical businesses to buy. I see us poised at the threshold of a
golden period, said
Paul Oreffice, chairman of giant
Dow Chemical Co (
DOW),
adding, Theres no major plant capacity being added around the world
now. The whole game is bringing out new products and improving the old
ones. Analysts say the chemical industrys biggest customers, automobile
manufacturers and home builders that use a lot of paints and plastics,
are expected to buy quantities this year. U.S. petrochemical plants are
currently operating at about 90 pct capacity, reflecting tighter supply
that could hike product prices by 30 to 40 pct this year, said
John Dosher, managing director of
Pace Consultants Inc of
Houston. Demand for some products such as styrene could push profit margins up by as much as 300 pct, he said.
Oreffice, speaking at a meeting of chemical engineers in
Houston, said
Dow
would easily top the 741 mln dlrs it earned last year and predicted it
would have the best year in its history. In 1985, when oil prices were
still above 25 dlrs a barrel and chemical exports were adversely
affected by the strong U.S. dollar,
Dow had profits of 58 mln dlrs. I believe the entire chemical industry is headed for a record year or close to it,
Oreffice said.
GAF chairman
Samuel Heyman
estimated that the U.S. chemical industry would report a 20 pct gain in
profits during 1987. Last year, the domestic industry earned a total of
13 billion dlrs, a 54 pct leap from 1985. The turn in the fortunes of
the once-sickly chemical industry has been brought about by a
combination of luck and planning, said Paces
John Dosher.
Dosher
said last years fall in oil prices made feedstocks dramatically cheaper
and at the same time the American dollar was weakening against foreign
currencies. That helped boost U.S. chemical exports. Also helping to
bring supply and demand into balance has been the gradual market
absorption of the extra chemical manufacturing capacity created by
Middle Eastern oil producers in the early 1980s. Finally, virtually all
major U.S. chemical manufacturers have embarked on an extensive
corporate restructuring program to mothball inefficient plants, trim the
payroll and eliminate unrelated businesses. The restructuring touched
off a flurry of friendly and hostile takeover attempts.
GAF, which made an unsuccessful attempt in 1985 to acquire
Union Carbide Corp UK, recently offered three billion dlrs for
Borg Warner Corp BOR, a
Chicago manufacturer of plastics and chemicals. Another industry powerhouse,
W.R. Grace (
GRA)
has divested its retailing, restaurant and fertilizer businesses to
raise cash for chemical acquisitions. But some experts worry that the
chemical industry may be headed for trouble if companies continue
turning their back on the manufacturing of staple petrochemical
commodities, such as ethylene, in favor of more profitable specialty
chemicals that are custom-designed for a small group of buyers.
Companies like
DuPont (
DD) and
Monsanto Co
MTC spent the past two or three years trying to get out of the
commodity chemical business in reaction to how badly the market had
deteriorated,
Dosher
said. But I think they will eventually kill the margins on the
profitable chemicals in the niche market. Some top chemical executives
share the concern. The challenge for our industry is to keep from
getting carried away and repeating past mistakes,
GAFs
Heyman cautioned. The shift from commodity chemicals may be ill-advised. Specialty businesses do not stay special long.
Houston-based
Cain Chemical, created this month by the
Sterling investment banking group, believes it can generate 700 mln dlrs in annual sales by bucking the industry trend. Chairman
Gordon Cain, who previously led a leveraged buyout of
Duponts Conoco Incs chemical business, has spent 1.1 billion dlrs since January to buy seven petrochemical plants along the
Texas Gulf Coast.
The plants produce only basic commodity petrochemicals that are the
building blocks of specialty products. This kind of commodity chemical
business will never be a glamorous, high-margin business,
Cain said, adding that demand is expected to grow by about three pct annually.
Garo Armen, an analyst with
Dean Witter Reynolds,
said chemical makers have also benefitted by increasing demand for
plastics as prices become more competitive with aluminum, wood and steel
products.
Armen