Chemical Makers Eye Capacity Investments


Profits are picking up in the chemical industry, leading suppliers to plan increased investment in new manufacturing capacity, according to the results of a recent survey by the American Chemistry Council.

It is an outlookthat should be welcomed by the lubricants industry and other customer segments, which have been strapped the past year by tightening availability of chemicals. But lubricant additive suppliers questioned whether their market will feel any relief.

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Chemical industry profits have sagged in recent years, but economic growth spurred demand last year and further improvement is expected by suppliers that responded to thecouncils Economic Survey: Outlook for 2005 and Beyond, which was released March 14. The weighted average of participant responses showed suppliers projecting that net operating income this year will jump a whopping 24.8 percent from last years levels. Respondents also projected sales revenues to grow by a weighted average of 5.6 percent.

The trends are similar for the specialty chemical segment, which includes the lubricant additive industry. Specialty chemical producers participating in the survey projected sales revenues will rise a weighted average of 7.6 percent this year and that net operating incomes will swell by 21.3 percent.

Not surprisingly, the survey found that better performance is making suppliers more inclined toward capital investment.

As capital spending cycles generally lag cycles of industry activity, improving profit margins will set the stage for moderate increases in new [plant and equipment] investment, the report said.

Specialty chemical companies projected plant and equipment spending to grow 27 percent this year to reach 5.7 percent of sales revenue. Respondents identified a variety of motivations for the additional spending – including better efficiency, health and safety measures and pollution abatement – but a weighted average of 39.9 percent of projected spending wasearmarked forplans to increase production.

Lubricant additive suppliers would love to see more production of chemicals they use, but cautioned that the general trend may pass over their materials. Lubricant additives account for just a portion of overall specialty chemical demand.

We saw the survey, but we wondered who responded to it, said Andrew G. Paxton, director of purchasing for additive supplier Afton Chemical. Were generally not hearing about plans for new investment – at least in materials that we use. We still expect the tightness [for chemicals used in lube additives] to continue for the time being.

In conjunction with tighter availability for raw materials, the lubricant additive market has faced sharp cost increases the past year. The survey suggested costs will continue to climb. Specialty chemical companies forecast a 5.9 percent rise in feedstock costs this year and a 7.5 percent increase in energy costs.

The council said there is also a trend for American chemical companies to invest in overseas plants. Specialty chemical suppliers said two-thirds of their total plant and equipment investments last year were in the United States, but that will drop to 50 percent by 2009. The portion spent in Chinais expected to jump from 4.7 percent to 13.1 percent. Portions devoted to other newly industrialized countries in Asia were projected to rise from 4 percent to 7 percent.

The ACCs report was based on survey responses from 62 member companies. Thirty-eight of those companies make specialty chemicals. The report isavailable for $100, $70 for ACC members. Order by phoning (301) 617-7824 or online at

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