29 December 2008 00:00 [Source: ICB]
The chemical sector easily withstood the deepest recession of the last century, emerging stronger than ever
UNCERTAINTY COUPLED with fear encourages dark speculation - just look at recent economic news. When chaos struck the capital markets in October last year, journalists and pundits almost immediately turned to the Great Depression of the 1930s for comparison, raising the possibility of deep, long-term suffering.
Chemical manufacturers would keenly feel the effects of such a slump, just as they did after the crash of 1929, when demand collapsed. A repeat is unlikely, however, while the Great Depression, if it does provide a guide, suggests that the chemical industry of today might weather a few difficult years before surging back on a new wave of innovation in both process technology and products.
Either way, an observation by the historian Michael Bernstein in his 1989 study, The Great Depression, suggests a useful attitude. "Competitive strategies during severe depression must be premised on optimistic expectations of the future," he wrote. "Product innovation, output expansion, and sales efforts proceed on the basis of an estimation of the potential market to be won by such actions."
THE PATH OUT
The current recession, already more than 12 months long, is likely to extend for at least another six, making it the longest since the 1930s. However, it is not even close to the recession of 1929-1933, which was much deeper and lasted 43 months in the US, notes Kevin Swift, chief economist at the American Chemistry Council (ACC). From 1929 to 1933, the real GDP of the US fell by 26.5% and overall industrial production plumeted by 53.4%, with the unemployment rate peaking at a whopping 24.9%.
Chemical production, by contrast, fell by 23.6% - a staggering decline, but also an indication that the industry's far-reaching, fundamental and innovative role in America's economy provided it with at least some shelter, if not enough to avoid the storm altogether.
Swift, who has made a hobby of collecting historical economic data for the chemical industry, reports that between 1929 and 1933 chemical industry revenues fell from $3.289bn to $1.947bn, a 40.8% decline. Prices, already weakened during the 1920s, fell by 23.1% during the same period.
Capital spending dropped from $144m in 1929 to a low of $44m in 1932. Exports dropped from $152m to $70m over the same period, swamped by a wave of protectionism that swept the world. Imports likewise fell from $144m to $48m.
Jobs disappeared, of course, with the number of production workers in chemicals falling from 285,000 in 1929 to a low of 231,000 in 1931, before rising to 235,000 in 1933, says Swift. DuPont, the largest US chemical company at the time, cut 10,000 employees between 1929 and 1932 as revenues fell from $214m to $127m, according to historian Fred Aftalion.
The situation in Europe was much the same. Employment in the Upper Rhine Group of IG Farben, the German chemical cartel, fell by more than half between 1927 and 1932, according to Werner Abelshauser's history of German chemical giant BASF. To minimize layoffs, the average work week for IG Farben employees, which had been 48-56 hours, was reduced to 40 hours in 1931.
By the mid-1930s, however, the chemical industry had recovered. Numerous consolidations helped streamline the industry, while a raft of new value-added products created profitable markets that would blossom after the coming world war.
Companies invested in innovation both to cut costs and to develop new and better products, Bernstein points out.
"As a result, the focus of investment activity in this industry during the 1930s was on technical innovation and product development rather than on simply seeking a rebound in standard output and sales," he writes. "The bulk of the derived demand for chemical products came from the rayon and petroleum producers, and, to a lesser extent, rubber, metal and paper corporations. And the depressed conditions prevailing gave added incentive to investment to improve on output recovery rates and the utilization of the wastes and by-products of reactions."
Petroleum played a starring role. On the one hand, the production and consumption of oil provided demand for new products. For example, DuPont's antiknock agent, tetraethyl lead was a huge success, with additive effects throughout the raw material supply chain. On the other hand, petroleum itself became an important source of inexpensive aliphatic hydrocarbons for companies such as Union Carbide and Carbon Company, which also derived ethylene oxide (EO) and vinyl polymers from the new feedstock.
Just as important were new processes developed to increase efficiency or exploit alternative feedstocks. For example, growing demand for high-octane gasoline led to the invention of catalytic cracking by Eugene Houdry. To address the growing market for bromine, US-based Dow Chemical invented a technology for its extraction from seawater. More generally, continuous processing was adopted as a cheaper alternative to batch processes, while automation was refined to improve the control of reaction conditions.
The decade saw the rise of polymer chemistry, as well. IG Farben introduced its styrene butadiene rubber (SBR), Buna. Germany-based Rohm & Haas developed Plexiglas, and UK-based ICI developed its own polymethyl methacrylate (PMMA), as well as polyethylene (PE). DuPont introduced neoprene, nylon and the fluoropolymer Teflon. DuPont also introduced the fluorocarbon refrigerant Freon. Innovative new surfactants, crop protection chemicals, pharmaceuticals, biocides and other products also appeared.
Indeed, chemical companies added more new product lines during the 1930s than enterprises in any other industry, according to the Cambridge Economic History of Europe. Chemicals was one of the most research intensive industries of the time, second only to the electrical industry, and well positioned to assume a strategy of growth through diversification into new markets.
Might innovation play a similar role in the years ahead? Innovation remains one of the chemical industry's defining characteristics. In recent years, 11 of every 100 patents has been assigned to a chemistry-based company, according to the ACC. Many of them originate from the pharmaceutical sector, which invested 10.8% of revenues in R&D in 2007. For the rest of the chemical industry, R&D spending was much lower: 1.5% of revenues. Still, advances in bio-, nano- or some other technology will almost certainly provide a basis for lucrative new markets.
OUTLOOK NOT TERRIBLE
In any event, the outlook, though poor, is not terrible. "We know a lot more about how the economy works," says the ACC's Swift. "We've learned many lessons from the Great Depression. Probably more important, there are many economic stabilizers in the economy right now that we didn't have then - unemployment insurance, guaranteed savings accounts, backstops that would help prevent the things we saw manifest.
"However, there is danger of a deflationary period resulting in something like Japan in the 1990s," he adds. Swift recently issued his Year-End 2008 Situation & Outlook. The consensus among business economists is currently that the US has entered a recession longer than that earlier in the decade, it notes, but shorter and milder than those of the mid-1970s and early 1980s. Worldwide, a mild global recession is expected.
"Global business of chemistry growth has essentially stalled since earlier in the year," Swift writes, "with outright decline in the developed nations and slowing growth in most developing nations. As a result, global output will moderate significantly in 2008 and will further slow in 2009 before recovery emerges in 2010."
Of course, for the 5,000 chemical workers just laid off at Dow, the 2,500 at DuPont, the 2,000 at Romanian fertilizer producer Azomures, the 2,000 at compatriot oild refiner Rompetrol, the 1,600 at US specialty chemical producer Solutia, and the many others who have already lost or soon will lose their jobs, recovery cannot come soon enough.
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