business

All The Ingredients Of A Comeback

All the important barometers show clearing weather for chemical makers in 1993. Their sales could rise 8% or so, to about $325 billion, while their costs, with the glaring exception of health care, should rise only moderately. Prices, which have languished for many chemical products for years, could shake off the blahs and jump 5%, thanks in part to healthier demand. In fact, most analysts think shipments could pick up 4.3% this year.

In short, 1993's outlook is the best for chemicals in some time. And if it's right, profits could take off. Based on a survey of its 175 member companies in late fall, the Chemical Manufacturers Assn. (CMA) thinks the industry's aftertax earnings could spurt 13% this year, to a record $26.6 billion. In part, this will be the initial dividend on a painful, multiyear campaign of restructuring and cutting costs and debt, says CMA's trade and economics director, Allen J. Lenz. Some downsizing is still going on. Monsanto Co., for one, took a $325 million aftertax writeoff in 1991 to close six plants and stash away money for environmental cleanups, among other things. Last year, the St. Louis company wrote down an additional $425 million, reflecting the elimination of 3,200 jobs, or 10% of its worldwide work force.

STRONGER DOLLAR? Most of the industry is ahead of Monsanto when it comes to cutting operating costs. On average, they will rise only 3% to 4% this year, predicts the CMA--at a time when other business conditions are improving. At yearend, for instance, the industry's inventory-to-sales ratio stood at 1.36, its lowest level since 1988. At such a level, even a small increase in demand should set plants humming. Already, the industry is operating at 80.9% of capacity, a reasonably profitable level. Analysts think that its operating rate could rise to 83% this year, just a tad below its recent high of 83.9% in 1988.

Anticipating such an upturn, chemical producers plan to increase their research and development spending by about 5%, to $14.7 billion. They will also invest $27 billion in new plant and equipment, an increase of 15.5%, or double last year's increase in capital outlays. Most of the new money will go to minimize plant waste and increase productivity, investments that can improve profits quickly.

A few chemical executives still are cautious about 1993. "The multiplier effect of the downsizing of the defense industry will continue to hit us this year," predicts A. Nicholas Filippello, chief economist at Monsanto. Others are alarmed at rising health-care expenses. Chemical companies expect an 11% increase this year in the cost of coverage for their 1.1 million employees. That burden is compounded by a new accounting rule that will take effect by the end of 1994 and will require all companies to show the projected cost of retiree health benefits on their balance sheets. To Union Carbide Corp., which has downsized sharply, this meant taking a one-time charge to net income, in December, of about $360 million after taxes.

RAMPANT PIRACY. Yet another worry is the possibility of a much stronger dollar in 1993. This could strike hard at U.S. chemical companies' overseas earnings. Dow Chemical Co., one of the earliest to expand abroad, reaped more than half of its estimated $14.3 billion sales outside the U.S. in 1992. Some $4.3 billion of that came from Europe, where weakening markets have caused surplus capacity in both plastics and heavy chemicals, such as ethylene. Dow expects some European producers to cut capacity this year as the European Community moves toward a single market. Still, U.S.-owned facilities there may have a tough time finding business. Some of these may thus seek new outlets in growing markets in Central and South America.

At the same time, though, large chunks of new capacity will come on line in southeastern Asia and the Middle East--and seek new markets. Thus U.S. chemical exports may rise only about 5%, to $47 billion this year, says Lenz, while imports grow even faster, perhaps by 10%, to about $30.5 billion. Lenz says this could cause the U.S. trade surplus in chemicals to slip about 6%, to $16.5 billion.

An accord in the General Agreement on Tariffs & Trade talks in Geneva would be a plus, of course. Presumably, it would lower tariffs and some nontariff barriers that hurt sales of U.S.-made chemicals in Europe. In some areas, such as agrichemicals, a proposed GATT agreement to strengthen intellectual property protection in Europe could also boost profits. There's no way to prove it, but some analysts think U.S. chemical companies lose hundreds of millions annually to foreign piracy of their proprietary products. Beyond that, passage of an investment tax credit at home would rev up industry profits, as would any major infrastructure investment by the new Administration. Thousands of chemicals, from pigments to polyurethane foam, are used in construction.

"At Hercules, we expect modest growth in revenues this year, but a 15% to 20% increase in profits," says James R. Rapp, vice-president for investor relations. That's a prospect most U.S. industries have been longing for since the 1980s.

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