Tampa Prep 2009-2010 Impact Defense File
AT: Chemical Industry Collapse
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AT: Chemical Industry CollapseChemical industry has been through worse and empirically bounces back Chemical and Engineering News, 2001 (12/24, http://pubs.acs.org/cen/topstory/7952/7952bus1.html) To call 2001 merely a difficult year for the chemical industry downplays the severity of events that eventually influenced general economic, business, political, and social circumstances. The repercussions of terrorist attacks late in the year only made a tough situation worse. The industry was already in a downturn at its start. This spawned an increasing number of job reductions, production cutbacks, business divestitures, and company mergers in the days that followed. For the first time in several years, a handful of companies declared outright bankruptcy, failing to find a way to survive the hard times. High energy and raw material prices were significant factors early on, only to come full circle and end the year at dramatically lower levels. Weakening international economies, slackening demand, overcapacity, the strong dollar, and a squeeze on prices and margins contributed to some of the poorest financial results in years. Chemical sales and earnings continued to decline. Mergers and acquisitions created some entirely new companies and others with new focuses. In the end, the Top 50 global chemical producers got shuffled and mixed, with a few new behemoths emerging. The decisions of government regulators had considerable consequences in these transactions, as well as in environmental and trade policies. The chemical industry has faced added challenges since the terrorist attacks on Sept. 11. Concerns about energy prices shifted to ones about production and supply security. Pharmaceutical producers were drawn into discussions about ensuring the supply of antibiotics and vaccines. And site security--long a key consideration for employee, community, and environmental safety--has been heightened as chemical plants and refineries are feared to be potential targets. On a positive note, advances in sequencing the human genome brought excitement to pharmaceutical discovery. Chemical companies advanced new production technologies and planned to slightly increase their investment in R&D. They also moved ahead with expansion plans around the world, while shutting down older, less efficient plants. The Internet continued to bring changes in how the industry conducts business, with many companies asserting themselves in the online world. Top CHEMICAL ECONOMY. Even in a lackluster year, the state of the economy is news, but given the precipitous declines of 2001, this year it is big news. Declining growth rates and contraction of gross domestic product in the U.S., exacerbated by many other negative factors, put enormous pressure on the U.S. chemical industry. Similar circumstances played out around the world, especially in Europe and Asia. The strong dollar made U.S. chemicals less attractive to foreign customers. For the first nine months of 2001, the latest data available, U.S. producers exported $60.8 billion in chemicals, a slight increase of 2.7% over the same period last year. At the same time, the U.S. became the place for foreign producers to sell to, with chemical imports into the U.S. up 9.0% to $59.4 billion. This caused the chemical trade surplus, long a point of pride in the industry, to fall 70% to just $1.4 billion. The trade situation also affected chemical shipments. Imports supplied some U.S. demand, but the U.S. recession had an even greater impact--shipments of chemicals through October contracted by about 3% to a total of $359.6 billion for the year to date, according to Commerce Department data. Of even greater concern has been the increase in inventories relative to shipments as the economy slowed throughout this year. Although chemical inventories have actually declined somewhat, the sell-off has not kept pace with the drop in shipments and has produced a high inventories-to-shipments ratio of about 1.50, which represents 1.5 months of demand. In December of last year, the ratio was 1.39. This inventory overhang has impacted both production and prices throughout the year, especially among commodity chemicals. After reaching an all-time high in February as producers tried to offset the high energy and feedstock costs, the government's producer price index for industrial chemicals has fallen 8.4%. Production of industrial chemicals and synthetics, based on government data, declined about 9% from last year. The downward spiral of the chemical economy this year has of course put tremendous pressure on sales, earnings, and profitability. For the first nine months of 2001, aggregate results for the 25 chemical companies regularly tracked by C&EN show year-to-year declines of 6% in sales and 44% for earnings. The aggregate profit margin for the group fell to 4.6% from 7.9% in the first nine months of last year. Economic conditions forced Borden Chemicals & Plastics to file for bankruptcy in April and Sterling Chemicals to file in July. Penn Specialty Chemicals also filed in July, and its assets were sold off in December. During the year, W.R. Grace also filed for bankruptcy, but to protect itself from asbestos liability litigation. However, Pioneer Cos., which filed in August, has reorganized and expects to emerge from bankruptcy by the end of December. After selling and closing some its businesses, LaRoche Industries emerged from bankruptcy in October. With earnings and profitability declines, one might think that Wall Street would be less than keen on chemical company stocks. However, stocks of chemical companies, as well as those in many other "old economy" industries, have actually benefited this year from the highly publicized technology meltdown as investors looked for safer havens for their money. Despite the ups and downs of the stock market throughout the year, by mid-December C&EN's stock index--based on the same 25 companies used for earnings--was down just 3% from where it closed in 2000. At the same time, the Dow Jones industrial average was off 8%.
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