Stronger consumer appetites for clothes, cars and electronics should fuel higher profits among U.S. chemical makers next year, even as executives worry that regulations may hamper long-term growth.
A jump in profits for companies such as Dow Chemical
The U.S. chemical industry makes the building blocks for thousands of common products, ranging from Amazon.com's
One positive indicator is that economists expect the U.S. gross domestic product to increase 2.7 percent in 2011 on an annualized basis.
Dow Chemical, the largest U.S. chemical maker by revenue, should see 2011 earnings increase 31 percent compared with expected 2010 levels. That's according to StarMine SmartEstimates, which puts puts more weight on recent forecasts by top-rated analysts.
For a graphic on 2011 chemical profit forecasts, click here: http://r.reuters.com/jyb43r
DuPont, with products that include Teflon non-stick coatings and Tyvek non-woven covering, should see earnings grow 13.7 percent next year, according to the StarMine data.
We're seeing slow, sequential improvement, DuPont Chief Executive Ellen Kullman told Reuters in a recent interview. We're not seeing a double-dip recession.
Smaller rival Solutia
Wall Street already bakes in these expectations. Most chemical stocks are at or near pre-recession levels, and the benchmark Dow Jones U.S. Chemicals index <.DJUSCH> is at an all-time high.
2010 was a year of recovery, largely driven by expanding trade, said Kevin Swift, chief economist with the American Chemistry Council, an industry trade group. But there's increasing talk about a supercycle in terms of profitability.
Part of that cash may go toward acquisitions, with about 54 percent of large chemical makers expecting to be involved in deals within 12 months, according to business advisory firm AlixPartners.
Exports, especially of polymers, will continue to be the industry's strength in 2011. Capital expenditures should increase 6 percent across the U.S. chemical industry, Swift said.
Demand for thermoplastics, a type of polymer that is easily shaped, is expected to remain robust. About 95 percent of U.S. plants that make the popular thermoplastic polyvinyl chloride, or PVC, are operating at full capacity, a rate not expected to slow next year.
U.S.-based chemical makers will continue to have an advantage in 2011 due in part to cheap North American natural gas. Most European chemical makers use naphtha, which is derived from expensive crude oil, to make their products.
With the U.S. literally sitting on a natural gas stockpile in the Marcellus Shale and other new fields, production of ethane, a building block for thousands of chemicals, should substantially increase.
Natural gas currently trades at about $4 per mmBtu, compared with roughly $90 per barrel for light, sweet crude. That price spread is one of the largest in recent memory, and lets U.S. chemical makers export products at attractive rates.
Through the course of 2010, we started to see better and better volume numbers coming out of the U.S., said Alembic Global Advisors analyst Hassan Ahmed. Things like auto sales numbers keep going up. The resiliency of the consumer seems to be returning.
POLITICS & POLICY
There is frustration within the chemical industry about pending rule changes by some U.S. regulatory agencies, despite gains by Republicans in November's U.S. elections that should help temper some of those concerns.
Chemical executives are worried the U.S. Environmental Protection Agency will make rules that would hamper innovation, including rules about toxic chemical storage.
The industry is particularly concerned about the EPA's pending Boiler MACT rule, which would regulate industrial boilers. The American Chemistry Council says the EPA is using faulty data and wants to impose far more stringent standards than are necessary.
Is the Obama administration going to continue a very aggressive and overreaching regulatory approach that does not give proper consideration to maintaining international competitiveness of the manufacturers in the United States? said Cal Dooley, president of the American Chemistry Council.
Dooley's comments come as the chemical industry is increasingly involved in skirmishes with environmental activist groups.
Greenpeace accused Dow Chemical in a lawsuit this year of literally digging through its trash as part of a spying operation. Dow has denied the charges.
(Reporting by Ernest Scheyder; Editing by Tim Dobbyn)