Chemicals Industry Refines its Strategy

Jan. 13, 2011
A dynamic shift is taking place in the chemicals industry as producers in mature markets focus on value-added specialty products to compete with low-cost countries.

The U.S. chemicals industry accounts for $674 billion in revenue, 780,000 U.S. jobs and more than 10% of the nation's exports, according to figures cited by the American Chemistry Council. But unless you're talking about the latest biofuels craze, the chemicals industry is often left out of "rebuilding U.S. manufacturing" conversations.

While maybe not as sexy as electric cars, high-tech gadgets or windmills, the chemicals manufacturing landscape also is shifting in mature markets such as Europe and the United States to remain competitive as lower-cost regions are experiencing significant growth in the basic chemicals industry. Faced with increasing cost pressures from emerging economies in the Middle East and Asia, many major chemicals producers are scaling back their domestic commodities-based businesses, investing in more specialty products and forming joint ventures in foreign petrochemical-rich regions, say industry experts.

Increasingly, chemicals producers in developed nations find themselves competing with integrated state-owned giants, such as Saudi Arabia's Sabic, that are expanding capacity throughout their respective emerging markets. That puts U.S. and European producers at a significant disadvantage. U.S. exports of commodity-based chemicals, such as petrochemicals and plastics resins, are expected to dwindle in the coming years, says Frantz Price, director of U.S. industry for IHS Global Insight.

With ample access to raw materials, chemicals producers in the Middle East and Asia can manufacture their products cheaper than anywhere else in the world, Price says. In the next five years 80% of new ethylene capacity will occur in developing markets, says Tim Hanley, vice chairman and U.S. process and industrial products leader at Deloitte & Touche LLP. In response, many major chemicals producers based in developed economies have adopted new market strategies.

Time to Specialize

Dave Kepler: "On the basic [chemicals] side we are doing much more partnering because of the large capital size of these investments." Midland, Mich.-based Dow Chemical Co., the largest chemicals manufacturer in the United States, has accelerated its "asset-light" transformational strategy that the company embarked on in 2005. Dow recognized that fast-growing overseas chemical producers, namely petrochemical arms of national oil companies, were benefiting from cost advantages because of their stable energy and raw material costs, says David Kepler, Dow's chief information officer.

The company's strategy includes investments in specialty chemicals businesses and divesting non-strategic assets. This resulted in a portfolio shift toward higher value-added products with greater intellectual-property content that are more tailored to customer needs, Kepler says.

The key event in this process was Dow's $15.4 billion acquisition in 2009 of advanced materials manufacturer Rohm & Haas Co., says Kepler. The deal, initially announced in July 2008, was completed in July 2009 after legal wrangling between the two companies and an agreement to divest several acrylics businesses as part of an order by federal antimonopoly regulators. The company's increased R&D and IP focus led to the development of its Powerhouse solar shingle in late 2009. Solar shingle is a roof shingle that integrates a solar cell and allows builders to avoid having to add solar tiles to a roof.

Outside the United States, Dow has formed joint ventures with several large petrochemical producers to gain access to feedstock supplies in the Middle East without investing heavily in assets. This includes a partnership with Saudi Aramco to build a giant petrochemical plant in Saudi Arabia. Dow said last August that it expects front-end engineering on the project to be completed in mid-2011. "On the basic [chemicals] side we are doing much more partnering because of the large capital size of these investments, and then we look at what product we can bring downstream and add value and technology," Kepler says.

Other large chemicals producers have adopted similar diversification strategies, including Dow rival German-based BASF SE and Huntsman Corp. BASF completed its acquisition of personal-care ingredients producer Cognis GmbH in December. The acquisition was part of BASF's goal to grow its Performance Products segment, the company said when the deal was announced. It also diversifies the company's "industrial exposure by going more downstream to customer-focused businesses," said BASF Chairman Jurgen Hambrecht in a June 23 conference call with investors when the deal was first announced.

Dow Chemical Co. has accelerated its "asset-light" strategy, which includes divesting many capital-intensive operations, investing in specialty chemicals and forming joint ventures with petrochemical companies in emerging markets. Pictured above are Dow cracking furnaces in Terneuzen, Netherlands. Photo: Dow Chemical
Huntsman, based in Salt Lake City, with 2009 sales of $7.8 billion, has steadily unloaded commodities-based businesses over the past several years to reduce its exposure to feedstock volatility. Like Dow, Huntsman has sought partnerships overseas to expand globally, including a 50/50 joint venture with Saudi Arabia's Zamil Group to build a new ethyleneamines facility. Ethyleneamine can be used for various applications ranging from fuel additives to bleach activators. In the past decade the company has grown its business in the Asia-Pacific region to more than 20% from 5%, noted CEO Peter Huntsman in the company's 2009 annual report. The inroads made by U.S. manufacturers in these expanding regions is increasing, but the majority of activity is still coming from local producers, says Deloitte's Hanley.

"Most U.S. management teams need a China strategy, so they're looking to make investments there, but the mass investments are mostly by national and state-owned companies," Hanley says. "But if you talk to most U.S. manufacturers, they have a strategy to add to current capacity or look to strategic investments."

Shale-Gas Boom

In recent years, though, U.S. producers have gained at least a short-term price advantage over many overseas firms. Domestic chemicals manufacturers are benefiting from historically low natural-gas prices driven in part by shale-gas discoveries. Natural-gas prices have dropped from as high as $12 per thousand cubic feet post-Hurricane Katrina to as low as $3.65 in 2009, ACC notes. At the same time, the price of oil has risen by approximately 20% in the past year, putting U.S. manufacturers in a favorable cost position, says Kevin Swift, ACC's chief economist. Europe and Asia rely primarily on more expensive naphtha and other petroleum feeds for their production of olefins compared with the United States, which uses primarily natural-gas- based feedstocks, says IHS' Price.

Fueled by higher prices and advances in exploration methods called horizontal drilling and hydraulic fracturing, shale-gas developments have advanced dramatically in recent years. U.S. natural-gas supplies from shale are expected to double from 2009 projections by 2035, the Energy Information Agency reported in its year-end energy outlook. The result for chemicals producers is lower ethane prices, a feedstock material derived from natural gas and used in hundreds of chemical-based products. Shale-gas production and lower natural-gas prices have contributed to U.S. chemicals exports as a share of total production doubling in the past five years, Swift says.

But in all likelihood the cost advantage U.S. firms are enjoying over Europe and Asia won't be for the long term, Price says. "The U.S.' position in those regions will erode in the long run as the Middle East intensifies its exports to both regions and Asia becomes more self-sufficient as it continues to build its petrochemical infrastructure," Price says.

U.S. producers of basic petrochemicals likely will remain cautious with respect to expanding their capacity because the domestic market is maturing, leading to slower demand growth, Price says. "U.S. producers will hesitate to expand their domestic capacity mostly on account of the export market, which tends to be insecure and quite volatile," he says.

That doesn't mean some chemicals manufacturers aren't exploring the possibilities. German chemical and pharmaceutical manufacturer Bayer AG is reviewing the potential of leasing or selling land in the Marcellus Shale development in West Virginia for outside investors who are interested in developing an ethylene plant, Bayer spokesman Bryan Iams said on Dec. 21. There are three existing Bayer sites within the Marcellus field. The sites are strategically located in the center of the field within reach of about 70% of the U.S. population.

Bayer utilizes natural gas as both a raw material and a fuel source. In addition, the company is investigating the role it could play at various points of the operation, such as processing, shipping and sustainable water treatment, Iams says.

Bayer sites under consideration include industrial parks in Institute and New Martinsville, W.Va., Iams says. "The valuable chemical feedstocks from such a cracking facility could be used to spur investment by current tenants and by other chemical producers located in the region," Iams says. The sites have direct access to major waterways, railways and highways.

ACC President Cal Dooley reiterated in the council's year-end report previous analyst statements that shale gas is a potential "game changer" for U.S. chemicals producers.

About the Author

Jonathan Katz | Former Managing Editor

Former Managing Editor Jon Katz covered leadership and strategy, tackling subjects such as lean manufacturing leadership, strategy development and deployment, corporate culture, corporate social responsibility, and growth strategies. As well, he provided news and analysis of successful companies in the chemical and energy industries, including oil and gas, renewable and alternative.

Jon worked as an intern for IndustryWeek before serving as a reporter for The Morning Journal and then as an associate editor for Penton Media’s Supply Chain Technology News.

Jon received his bachelor’s degree in Journalism from Kent State University and is a die-hard Cleveland sports fan.

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