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Chemicals: The Cauldron Is Brimming With Profits


Manufacturing

CHEMICALS: THE CAULDRON IS BRIMMING WITH PROFITS

After running their factories nearly flat out for much of the past year, chemical makers may find themselves hard-pressed to meet still-booming demand in 1995. Executives surveyed by the Chemical Manufacturers Assn. (CMA) expect sales to rise as much as 8% this year, to $367 billion. And with big price hikes paying off handsomely, profits could rise as much as 15%, to $33.4 billion. Says Allen J. Lenz, the CMA's economics director: "There's every reason to think 1995 will be a good year for the world economy, and that means it should be a good year for the chemical industry."

Chemical plants are expected to run at over 85% capacity this year, up two percentage points from 1994. And manufacturers will still be hard-pressed to meet the rising demand. For instance, ethylene--a widely used basic chemical whose production was curtailed by flooding in Houston last year--has remained in short supply even though those plants are back on line. The result: Ethylene prices soared from 17 cents a pound in the spring to more than 30 cents now.

Some chemical buyers fear that price hikes will continue. Foamex International Inc. in Linwood, Pa., a $1 billion-a-year maker of polyurethane foam used in such products as carpet cushions, autos, and mattresses, expects to pay roughly $5 million a month more for polyols and other raw materials. In turn, the company is charging 8% more for its products.

POSSIBLE PINCH. Still, there are limits to how far the price spiral can go. Higher interest rates could weaken the housing and auto markets, trimming demand for plastics, fibers, and other chemical products. So the smart money is betting that price hikes will moderate, even though that could pinch earnings for some suppliers toward yearend. For chemical makers who can't pass on higher ingredient costs, says DuPont Co. Chief Economist Richard A. Stuckey, "profitability could deteriorate."

That's hardly a worry now, though. With big restructuring write-offs behind it, DuPont last year boosted its net income some 59%, to about $2.65 billion, while hiking sales 5%, to $39.1 billion, estimates Bear, Stearns & Co. analyst Jeffrey J. Cianci. He figures DuPont this year will boost its net income 15%, to $3.06 billion, while lifting sales some 6%, to $41.4 billion.

Many companies should be aided by savings from years of restructuring. Union Carbide Corp. may save some $400 million this year, lifting earnings from continuing operations as much as 35%, to $477 million, after Carbide more than doubled its income last year. The company's sales this year could climb 9%, to $5.3 billion, Cianci figures.

BACK TO BASICS. Several producers will be helped by a three-year wave of spin-offs that may at last have crested. After selling such noncore businesses as oil exploration and mining in the past few years, W.R. Grace & Co. has its core chemicals businesses down to a more competitive five from over a dozen far-flung units. The result: This year, Grace could boost profits 19%, to $336 million, on a sales rise of 13%, to $5.7 billion.

If they stick to their knitting, American chemical companies should stay ahead of foreign competition. So far, worries about global oversupply have proved unfounded as offshore producers in such fast-growing spots as Asia have barely been able to keep up with demand. As a result, the U.S. chemical trade surplus grew 4% last year, topping $17 billion, says the CMA. It may climb still higher this year. What's fueling it? "We'll have continued very high growth rates for a lot of the less-developed countries," says CMA economist Lenz.

Perhaps the biggest worry for chemical makers is that the good times may blind them to the cyclical industry's inevitable downturn. At larger companies, spending on plants and equipment may rise as much as 18% this year, compared with a 10% hike last year, say executives surveyed by the CMA. Together, large and small companies last year hiked their capital spending some 7.2%, to $23.4 billion, partly to meet tougher environmental regulations. That figure could rise an additional 13% this year. For now, however, producers have kept other costs in check, shaving employment 1.9% last year, to just over 1 million workers. By avoiding overexpansion now, they'll better weather the eventual bust--whenever it comes.Joseph Weber in Philadelphia


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