Lean, Mean, And...Healthier?

Downsizings and spinoffs have been the hallmark of the chemicals business over the past three years, and now they could be about to pay off. Sales of chemicals may rise only 5% this year, to about $327.6 billion, according to a survey of 107 producers by the Chemical Manufacturers Assn. (CMA). But cost-cutting could boost profits 10%, to $23.1 billion, recouping last year's 10% decline. In fact, some analysts think 1994 will start the industry on a climb back toward pre-recession prosperity.

Industry executives can't take that for granted. Worldwide, there's still overcapacity in many chemicals and prices may stay flat all year. Even dirt-cheap oil--which holds down the cost of the feedstocks from which chemicals are made--can't compensate for that. Facing similar conditions last year, American Cyanamid, Ethyl, and Eastman Kodak all decided to spin off chemical units to focus on drugs, petroleum additives, and imaging products, respectively. DuPont Co. wrapped up two years of downsizing, during which it eliminated more than 17,000 jobs, or 12.7% of its work force, by selling

its Remington Arms Co. After deducting $1 billion in write-offs, the chemical giant earned only about $800 million on revenues of $36.8 billion.

This year, DuPont's profits should reach $2.4 billion on sales of $38.6 billion, estimates analyst Paul Raman of S.G. Warburg & Co. The improvement will reflect rebounds in two of its major markets, autos and housing, plus a continuing effort to lean down to its "core competencies" in chemicals, fibers, and polymers. That campaign will eliminate at least 2,800 more jobs, nearly half in Europe. Across the industry "we'll see a lot more spinoffs" this year, adds Raman. Some possibilities he sees: DuPont could jettison its $1.8 billion imaging business, or--a long shot--its $15 billion Conoco unit. DuPont won't comment, but has long insisted that it plans to keep Conoco. Such moves are possible, Raman says, because the asset values of chemical producers are rising as the U.S. market revives and as European producers prepare to shrink.

SAFER ANTIFREEZE. For players who stay in the game, it will be more important than ever to be a low-cost producer and to develop novel uses for products. Arco Chemical Co., for example, may have found a winning use for propylene glycol, a derivative of the commodity propylene oxide, which is used in car seats and furniture. Safe Brands Corp. in Omaha is using propylene glycol in a new antifreeze called Sierra, which it claims is safer than ordinary antifreeze, since it doesn't contain poisonous ethylene glycol.

Even though new products are crucial, the industry isn't exempting research from its cost-cutting drive. After rising an estimated 4.3%, to about $14.5 billion last year, R&D spending may grow just 3% this year, according to the CMA. Industry heavyweights, after overexpanding in the late 1980s, also plan to remain stingy with capital outlays, which may rise little more than 2.5%, after a paltry 1.8% increase last year, to $23.4 billion. The industry will be able to make do: In 1993, its plants ran at 81.2% of capacity, only a half-point higher than 1992 and well below the 86.8% peak in 1988. This year, utilization may hit only 82%--held down by the effects of recent capacity additions in the Middle East and Asia.

NEW CUSTOMERS. That modest tightening of capacity won't leave much room for prices to rise. Analysts say that toward yearend polyvinyl chloride--the PVC in plastic pipes--may rise one cent a pound, to 31 . They expect ethylene, a basic chemical used to produce other chemicals, to stay flat at about 20 until 1995. That's partly because the growth of trade in chemicals is eroding price differentials around the world. "Global pricing is more apparent than ever before," says Richard A. Stuckey, DuPont's chief economist. Indeed, as hungry foreign producers offered bargain prices to U.S. buyers, the U.S. trade surplus in chemicals shrank to $15.6 billion last year, from a 1991 high of $19.2 billion. This year, it may dip below $15 billion, says CMA economist Allen J. Lenz.

Increased trade also has a bright side for U.S. producers, however: They have picked up new customers in Latin America, Hong Kong, and even Japan. And over time, the North American Free Trade Agreement should boost chemical sales to Mexico. By the end of the decade, the CMA figures, those exports should rise by $1.2 billion, to $8 billion. Mexico already imports $3.5

billion worth of U.S. chemicals, making it the U.S. industry's No.3 market, behind Canada and Japan. The General Agreement on Tariffs & Trade should gradually boost U.S. exports, too--though the 1994 impact will likely be small.

Gradual improvement may be all the industry can expect this year. But after the scorching chemical makers took in 1993, any gain will be welcome. The outlook, says Marvin O. Schlanger, president of Arco Chemical Americas, "could be a hell of a lot worse."