Slowdown provokes a benign reaction

The faltering US economy may be about to slam the brakes on global growth, but leading chemical companies believe they have the right formulas in place to keep business ticking over.

Whimsical economists are an uncommon species, especially when they come bearing bad news. But BP’s chief economist, Malcolm Mitchell, has never fulfilled the stereotypes. Speaking at the Chemical Industries Association’s recent business outlook conference in London, he drew some unusual analogies for the world’s economies.

The US economy, he said, was like Superman: ‘apparently immune from all evil forces and saving the world from a fateful end’. But even Superman has his weak spot, and the kryptonite of economic slowdown is looming — with possible dire consequences for the chemical industry.

For the past four years, the US economy has grown at 6% a year — ‘neither sustainable nor desirable’, says Mitchell. Growth has been driven by sustained industrial productivity, but this has started to wane — along with salary increases, the stock market and investment.

‘The question is not whether the eagle is landing, but whether it’s cruise or crash,’ Mitchell says. He believes growth rates will fall to a much lower, but more normal, 2.5% this year.

He adds that in the past, Europe has played Clark Kent to the US’s Superman: ‘big, solid, dependable — but a bit dull’. But in the past year European growth rates have reached 3.5% — the fastest in over a decade.

With the world economies facing what Mitchell sees as ‘a slowdown, but not a recession’, where does this leave the chemicals industry?

Global chemicals output has rebounded from its slump in the Asian economic crisis, with world production rates up 5% in 1999 and 4.5% last year. European growth was even faster. Rebuilding of stockpiles at European chemicals customers and booming exports to Asia and Europe saw output soar by 10% at the end of 1999, before falling back to 3 – 4% in 2000.

Downturn not disaster

Mitchell believes the slowdown will continue in 2001, with global production growth falling to about 3.5%. Europe can expect similar growth rates, down by about a fifth. The US slowdown’s lower demand in Asia as it de-stocks, and an expected strengthening of the euro will add to this. But, says Mitchell, the overall picture is one of moderate downturn, not disaster, with internal European chemical demand holding up.

Last year saw extraordinary growth in UK production, of around 4%. This is encouraging, but Mitchell warns: ‘Volume was achieved at a price, with profitability taking much of the strain. We can expect a sharp downturn in volume growth this year, reflecting a softer domestic economy and a worse trade environment in Europe and with the rest of the world.’

What do individual companies make of this scenario? BP Chemicals’ size, and its status as an operating division of a large oil company, somewhat insulates it from chemicals industry trends. But it still sees the need to change with the times, says its chief executive, Byron Grote.

‘Until the mid-1980s, European chemical companies outperformed their respective financial markets,’ he says, ‘but since then we have tried the patience of the investment community by underperforming the alternatives.’

The industry must ‘recapture the positive perception it once commanded’, Grote says. He believes the environment is central to this: ‘The way we manage this determines our very licence to operate.’

BP Chemicals’ efforts on this front include cutting discharges to water by a third and emissions to air by two-thirds; bringing in an emission trading scheme between plants; and management of its sites to maximise biodiversity.

Grote also stresses the company’s commitment to innovation. ‘It is the only way to underpin growth and refute the allegation that this is a mature sector,’ he says.

Life sciences, particularly pharmaceuticals, tend to grab headlines when it comes to research, but Grote is proud of BP Chemicals’ achievements in the fields of acetic acid, vinyl acetate monomer and the production of acrylonitrile, all of which will help it use raw materials and energy more efficiently.

The company is also working to improve the way it deploys staff — for example, making them directly responsible for site operations, which promises to increase productivity.

Huntsman’s is a very different chemical company. Owned by the Huntsman family from Salt Lake City, it does not have to worry about shareholder value, price/earnings ratios or the vagaries of the stock market.

European chairman Rob Margetts, a former ICI vice-president, says the company is strongly focused on growth. It has a reputation for picking up businesses at a low ebb, for a low price, but Margetts rebuts this: ‘We often put together an offer for a high-value company with a low-value one,’ he says.

The rewards have been considerable — Huntsman is the world’s number-one producer of maleic anhydride and polyetheramines, the number one producer of titanium dioxide in Europe, and the US number two for butadiene, cyclohexane, ethanolamines and ethylene, and propylene oxides.

Huntsman’s sees a number of opportunities in the present economic climate, because its structure allows it to be ‘financially creative’.

‘We are looking at new segments that have the capacity to capture value in their supply chain, particularly further downstream,’ Margetts says. ‘We are also looking for consolidation and restructuring opportunities.’

Huntsman’s 2001 targets include the development of ICI’s former polyurethane business in India, and the UK company’s exit from its olefins joint venture centred around Wilton, Teesside. It is also looking at a petrochemical joint venture in Saudi Arabia, and the Rhodia/Albright & Wilson surfactants business in Europe.

Exploiting outsourcing

Further downstream, Ascot Chemicals is a small specialities player trying to find its niches. Head of strategy Jonathan Hale says it is exploiting the trend towards outsourcing by offering custom processing services for petrochemical additives and, particularly, pharmaceuticals ingredients.

‘More than 90% of US companies outsource activities,’ Hale says — and Europe is catching up, with outsourcing growing at 8–10% a year since 1993.

For speciality chemicals producers, the attraction is not having to build their own plants, reducing time to market and being able to contract out excess demand. For fine chemicals, cutting time to market is the main factor, along with the ability to access manufacturing and process development technology or expertise perhaps unavailable in the increasingly research-led drugs industry.

Hale sees another side to consolidation: as companies merge, they tend to spin off non-core businesses. If these are not swallowed up by other big, corporate fish, then separated from their parent company, they can lack manufacturing capability — which is where small outsourcing specialists can step in.

‘For speciality firms, the challenge is to be the right size, to make the most efficient use of resources,’ Hales says.

‘But for fine chemicals, you need the right technology to cope with the more complex syntheses and processes. We can cope with both of these.’

Superman might be about to make a landing, but from the viewpoint of these three very different companies, he shouldn’t have to worry about tripping over any kryptonite yet.