The businesses of chemicals, coatings and plastics are closely linked, and those sectors, in turn, are closely linked to the oil and gas industry. Plastics comprise a branch of petrochemicals—that is, chemicals refined from petroleum. (Although a small amount of bioplastics is now being produced from plants such as corn.) Coatings, which include paints, are chemical concoctions. Other everyday chemicals products include pharmaceuticals, fertilizers, dyes, fibers, packaging, adhesives and explosives, among many, many others. Among the more visible end products are PVC (polyvinyl chloride) pipe for plumbing and other purposes, plastic bottles and other food containers, vinyl window frames, flooring and carpeting made from vinyl and other synthetics, as well as clothing of all types made from synthetic fabrics.
This is a research-based industry that requires massive capital expenditures on the production end. According to the American Chemistry Council, U.S. chemicals companies invested $57 billion in research and development in 2012 alone. BASF, the world’s largest chemical firm, has 10,000 research personnel worldwide. While the firm is based in Germany, its R&D labs are spread around the globe, including major facilities in the U.S. in Florham Park, New Jersey (its North American headquarters), Research Triangle, North Carolina (where it runs one of the world’s largest agricultural chemicals research facilities) and St. Louis, Missouri (a pest control lab). The company’s continuing investment in infrastructure is equally impressive. BASF estimates it will invest $15.5 billion in capital expenditures from 2011-15, expanding and enhancing many of its 390 production facilities worldwide.
Chemicals is also a cyclical business, highly subject to costs for basic commodities (especially oil and gas) and open to rapid changes in fortune due to the ups and downs of the global economy. The global recession of 2007-09 was disastrous for the chemicals industry as a whole, as demand plummeted for everything from plastic packaging to paint used on construction projects to industrial chemicals. As the economy started to bounce back in many nations, the chemicals industry quickly picked up pace.
The global chemicals industry will total about $4.6 trillion in 2013, according to Plunkett Research estimates, or about 6% of global GDP. In the U.S., chemicals will generate about $830 billion in revenues in 2013, up from $800 billion in 2012. U.S. plastics and rubber industry revenues were $215.5 billion in 2012, according to the Bureau of the Census.
Total employment at U.S. chemicals manufacturing firms fell to a new low in January 2011, 779,900, down from 923,400 in January 2003. However, as of January 2013, employment in this sector rose slightly to 790,300 (and rose further to 794,500 in April 2013). Employment at plastics and rubber plants fell from January 2003’s 831,100 to 637,500 in January 2012, but was up in January 2013 to 651,600 (and rose further in April 2013 to 656,500). After several years of closing and layoffs in the U.S., chemicals and plastics companies were taking advantage of abundant (and cheap) natural gas supplies and building new facilities as of 2012 and into 2013. For the first time in a long time, the future looks reasonably bright American chemicals makers.
However, for 2013-14 the global industry faces uncertain times. As of July 2013, slowing economies in China, India, Brazil and throughout Europe are likely to lead to weak demand for chemicals, plastics and coatings. The strength of the automobile industry in the U.S. will remain one of the most positive factors in chemicals demand. Meanwhile, America’s chemicals sector manufacturers will reap considerable advantage from the extremely low price of natural gas seen in mid-2013. The immense surge in shale gas and shale oil production is having a tremendously positive effect on the chemicals sector. Low prices for basic inputs are leading to a boom in chemicals plant construction on the Gulf Coast of America, close to major gas fields. In particular, the manufacture of ethylene-based plastics is a major benefactor of today’s boom in low-priced natural gas from shale formations. Makers of oil-based chemicals (propylene polymers) were likewise getting relief from the reasonable level of U.S. oil prices, although prices increased in mid-2013.
While the chemicals industry is most definitely cyclical, gaining and losing ground with changes in the global economy, long-term trends point to increasing demand for many types of chemical products. To begin with, a swiftly aging population with growing access to, and budgets for, drugs of all types is causing demand for life sciences chemicals to soar. Eventually, worldwide demand for the construction of new commercial buildings and new housing will once again fuel growth for chemicals used in building products of all types. The extremely rapid industrialization and commercialization of markets in China and India, two nations where an immense proportion of the world’s population live, is creating demand for industrial and consumer chemicals of all types. Finally, a rapidly-expanding transportation market worldwide, including the growing number of automobiles and trucks on the road, will create greatly increased demand for chemicals, coatings and plastics used in the manufacture of automobiles. (Lightweight plastics are extremely important for the manufacture of fuel-efficient vehicles.)
Growing demand for consumer products and convenience products, such as processed foods and beverages, is enhancing demand for plastic packaging on a worldwide basis. Meanwhile, makers of many components in major commercial and consumer products are switching to plastics due to the durability, light weight and long life of plastic. As industry leader BASF puts it, “In brief, plastics will be the material of the 21st Century.” Global consumption of plastics is now in excess of 180 million metric tons yearly.
Meanwhile, consumer concerns and environmental activism about packaging have come to the fore. Plastic grocery and shopping bags have become evil in the eyes of some. In the U.S. alone, plastic bags are about a $4 billion industry. In America and elsewhere, bags to a growing extent are seen as a big burden to landfills and an even bigger eyesore in the form of litter. Recycling is modest at best. Various answers are being developed. Biodegradable bags would be welcomed by many consumers, even if they drove up costs a bit, and reusable string, nylon or canvas bags are very much in vogue. Paper bags are now more in evidence; at least they are clearly biodegradable. Meanwhile, more than two dozen U.S. cities have proposed or legislated bans on the use of plastic bags, and the entire nations of Taiwan and Bangladesh have outlawed them.
Next, a crisis in plastic bottles occurred in early 2008 in the U.S., Canada and elsewhere. Consumers are concerned about the use of BPA or bisphenol-a, which is commonly used in the manufacture of the hard, clear polycarbonate plastic bottles for juices, drinks and other liquids. Many manufacturers promptly announced they would no longer use BPA. Environmental concerns, health concerns and consumer backlash regarding packaging will grow in coming years.
Watch for rapid changes within the chemicals sector, as many factors with the potential for driving the industry in new directions are at work. These include a growing use of biotechnology to create bioplastics (from plants such as corn) as well as biochemical products such as enzymes and solvents; consolidation, mergers and acquisitions on a worldwide basis; increased environmental regulations and concerns; the rise of nanotechnology in chemical applications including composites, coatings and exotic materials; technological breakthroughs; and the rapid rise of China as both a producer and consumer of chemicals and chemical products. BASF sells hundreds of millions of dollars worth of products that incorporate nanotechnology each year. These products include nanochemicals for textiles, paints, cosmetics, electronics, insulation and lighting.
Many manufacturers of plastics products now find that they must move beyond basic offerings to become ODMs (original design manufacturers). This means that they offer value-added services in addition to manufacturing, including engineering, design and perhaps increased logistics support.
Consolidation within many industry sectors continues. For example, global ethylene production is now concentrated in a handful of major firms. Recent examples of the consolidation trend include the Dow Chemical acquisition of Rohm and Haas, which was completed in the spring of 2009; the 2011 DuPont acquisition of Danish firm Danisco for $6 billion; and the 2011 Solvay acquisition of Rhodia for $5 billion. Many of today’s acquisitions are driven by a desire to pick up companies that manufacture higher-profit margin specialty chemicals.