Chemicals and allied products - Industry Overview

Chemical and allied products (SIC 28) are used in all industrial and agricultural areas of the economy. The products, ranging from commodities to specialty and high technology items, are used in such major sectors as transportation, electronics, construction materials, textiles, advanced materials, other durable goods, and consumer related products. Chemical products include inorganic, organic, industrial gases, plastic resin, plastic products, synthetic rubber, paints, adhesives, fertilizers, pesticides, food additives, drugs, cosmetics, soap, and detergents. More than 50,000 different chemicals, compounds, composites, and alloys are produced.

The U.S. chemical industry is the largest in the world, accounting for nearly 30 percent of world chemical markets. It is closely tied to the health of the U.S. economy, as reflected in movements in the GNP, personal consumption expenditures, retail sales, and interest rates. Therefore, chemical industry activity can be viewed as a leading economic indicator.

Before reading this chapter, please see "How to Get the Most Out of This Book" on page 1. It will clarify questions you may have concerning data collection procedures, factors affecting trade data, forecasting methodology, the use of constant dollars, the difference between industry and product data, sources and references, and the Standard Industrial Classification (SIC) system. For other topics related to this chapter, see chapters 9 (Textiles), 10 (Paper and Allied Products), 12 (Industrial and Agricultural Chemicals), 13 (Plastics and Rubber), 17 (Advanced Materials), 35 (Cleaning Preparations and Cosmetics), and 44 (Drugs).

The constant-dollar value of shipments by the chemical and allied products industry increased by only 0.6 percent in 1991 (down from the 2.8 percent increase in 1990 over 1989). This was the lowest annual growth rate for the industry since the mid-1950's. Aggregate shipments increased by 1.2 percent to about $292 billion in 1991. Capacity utilization (output as a percentage of plant capacity) decreased from 78 percent in 1990 to 77 percent in 1991. Apparent domestic consumption (product shipments plus imports minus exports) fell by 0.1 percent in 1991, reflecting a slowdown in domestic economic activity that began in the second half of 1990 and resulting in a drawdown of chemical inventories.

INTERNATIONAL COMPETITIVENESS

Chemical exports, shipped to more than 185 countries, increased by 12 percent to $42.4 billion in 1991, and imports rose by 4.1 percent to $22.5 billion. The result was a positive trade balance of $19.9 billion. The export increase was broad-based across all sectors of the industry. Consequently, the ratio of exports to shipments increased from 13.1 percent in 1990 to 14.5 percent in 1991.

Nearly every country produces chemicals. Their production and manufacture differ because of varying natural resources (mainly fuel and feed stock), standards of living, tariff and non-tariff barriers, and local government policies. Many developing countries know and understand the need for a healthy chemical industry because it is central to the rest of the economy. Some countries will change their policies in an attempt to attract chemical investments to satisfy domestic needs and eventually produce for export, but many will not. There is a limited amount of investment capital that will flow from developed countries to those countries that encourage foreign investment in their chemical industries.

Countries making changes in their chemical investment policies include Mexico and other Latin American nations, the Soviet Union, Eastern European countries, China, and South Korea. Issues that countries need to address include, but are not limited to, intellectual property rights, product liability, property ownership, taxes, environmental costs, and transportation. Other factors for consideration are special bilateral, regional, and multilateral trade agreements such as the U.S.-Canada Free Trade Agreement, the proposed North American Free Trade Agreement, the European Community (EC) and its relationship with Eastern Europe (including the role of Germany), and the Uruguay Round of the General Agreement on Tariffs and Trade.

Given the rapid changes taking place, many new corporations, partnerships, and private-sector agreements will be established around the world in the chemical industry. The single largest change will be recognition that the private sector is the best hope if governments are to be successful in moving toward market economies. Established contacts in the Soviet Union and Eastern Europe will pay off in the long run.

Outlook for 1992

The constant-dollar value of chemical industry shipments is expected to increase by 1.4 percent in 1992, reflecting GNP growth and improved economic conditions. The 1992 recovery of the manufacturing sector, and low inventories and prices in the chemical industry, will lay the foundation for the industry's expansion. Capacity utilization will increase to a range of 81-83 percent in 1992, still below the 87 percent level in 1989. Exports are forecast to increase by 5 percent and imports by about 4.4 percent, resulting in a record trade surplus of nearly $21 billion in 1992.

Restructuring will continue with direct and indirect foreign investment occurring worldwide. More value-added products will be produced, with emphasis on specification and performance-driven requirements. Overall, the industry will concentrate on high-unit price products, rather than low price, high-volume chemicals. Capital expenditures and R&D spending will both increase to new highs in 1992, reaching levels of $25 billion and $15 billion, respectively.

Long-Term Prospects

Chemical industry growth will depend on domestic economic performance, international trade, foreign earnings, and new technological products. The industry is likely to grow somewhat faster than the U.S. economy as a whole. During the next 4-5 years, the value of chemical exports is expected to offset the value of total U.S. imports of crude oil. The chemical sector should be one of the industries contributing most to reducing the U.S. merchandise trade deficit.

The major chemical competitors of the United States - most EC countries, Japan, and Canada - are likely to remain in these positions. South Korea, Taiwan, and Mexico have become increasingly competitive in international markets and will become more so during the next decade. Until 1987, the U.S. chemical industry invested more abroad than its foreign counterparts did in the United States. Since then, however, this situation has reversed and will likely continue in the 1990's.

The industry is very concerned about costs, so restructuring will continue. Small and mid-size firms will begin producing more commodity and specialty chemicals to satisfy domestic demand, as well as to start exporting. They also will invest in other countries to help meet growing global chemical consumption.

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PETROCHEMICALS

Petrochemicals (SIC 2821, 2822, 2824, 2843, 2865, 2869, 2873, and 2895) are chemicals and chemical products derived from petroleum, refined petroleum, natural gas, and natural gas liquids. More than 90 percent of organic chemicals are petrochemicals, which are a major part of the U.S. chemical industry. The value of petrochemical industry shipments increased by 0.4 percent in constant dollars in 1991. This was the smallest increase in the post-World War II period. In 1991, the value of petrochemical shipments amounted to nearly 43 percent of total chemical shipments.

Major plants are located on the Gulf and West coasts and in New Jersey, Delaware, and Oklahoma. Petrochemical production is capital intensive, requiring state-of-the-art equipment and technology. Fuel and feedstock costs amount on average to more than 50 percent of total costs in the industry, and to more than 90 percent for primary petrochemicals. Total employment in petrochemicals is slightly more than 30 percent of the total chemical industry work force.

INTERNATIONAL COMPETITIVENESS

In 1991, total exports of petrochemicals increased 13.2 percent, and imports 5.5 percent, compared with 1990. Exports of primary and intermediate petrochemicals increased more than 23 percent in 1991. Petrochemical exports were about 56 percent of total chemical and allied product exports. The ratio of petrochemical exports to shipments reached a level of about 19 percent in 1991.

The industry is very competitive; many new production facilities are coming on stream around the world. A healthy petrochemical industry requires a high level of investment over a long period of time. Because it is a capital-intensive business, countries will need to eliminate barriers so that the following four investment factors will allow them to become competitive internationally:

* Investment must be made in primary product plants.

* The large number of plants required to produce intermediates must be allowed to be established.

* Additional investment will be required to assure use of finished petrochemicals and co-products.

* High-technology, chemical processing end users - auto parts, electronics, construction materials, and other durable goods industries - are essential for continued support of the industry. The relationship between primary petrochemical production and major consumer products is complex, so it is vital to remove barriers and allow the development of a more modern and safe industry.

Outlook for 1992

Shipments of petrochemicals are forecast to increase by about 1 percent in constant dollars. Exports will increase by 4 percent and imports by 5 percent, resulting in a positive trade balance of more than $14 billion. Inventory is low, and capacity utilization will begin to increase to the high levels reached in the late 1980's. Prices will improve, thereby increasing profit margins.

Long-Term Prospects

The industry will continue to undergo major restructuring as increased production shifts to energy rich countries. As a result, there will be periods when worldwide production will exceed demand for many primary and secondary petrochemical products. Investors will need to pick countries offering the best possibilities, recognizing that world overcapacity will develop for many petrochemicals. A recent survey concluded that as much as $40 billion will be needed to build world-scale plants, modernize other facilities, and meet more stringent environmental standards.

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REGULATIONS IN THE CHEMICAL

INDUSTRY

The U.S. chemical industry is subject to stringent regulation under varied statutes and regulations designed to protect and improve the nation's health, safety, and environment. These regulations influence the industry's products, processes, and production costs. According to the Chemical Manufacturers Association (CMA), in 1990 the chemical industry spent $1.68 billion on capital expenditures for pollution abatement; annualized operating expenditures for pollution abatement accounted for an additional $3.83 billion. The following is a summary of the major Federal regulations affecting the chemical industry.

Emergency Planning and Community-Right-to-Know

Act

The Emergency Planning and Community-Right-to-Know Act is the third title of the Superfund Amendments and Reauthorization Act, signed into law in 1986. Known as Title III, this mandates emergency planning and gives communities the right to know more about hazardous materials used by certain industries.

Nearly every industry or business that produces, stores, buys, or ships hazardous materials is covered under the law. For these industries, Title III sets specific reporting requirements and deadlines. Since October 1987, companies involved in the production or handling of certain hazardous materials have had to submit material safety data sheets or lists of chemicals kept onsite. On July 1 of each year, covered companies also must report inventories of specific chemicals kept in the workplace and annual releases of hazardous materials into the environment. This Toxic Release Inventory information is available to the public. In addition to their reporting responsibilities under Title III, covered companies are required to participate in the local emergency planning efforts mandated by the law.

Covered industries so far have reported environmental releases made from 1987 through 1990. The 1987 and 1989 data are already in an Environmental Protection Agency (EPA) computerized data base that can be accessed by the public. The 1990 information also will be entered into the data base. In 1990, Congress expanded the reporting requirements to include pollution prevention efforts. These new data will track the amount of waste that is generated and recycled.

Clean Air Act

The Clean Air Act prohibits hazardous air pollutant discharges in excess of emission standards. The act's 1990 amendments impose new standards on the industry. Under the guidelines, controls for industrial sources of 41 pollutants must be in place by 1995; for 148 other pollutants, the deadline is 2003. Regulations to implement the act have been proposed by EPA. Compliance with the new requirements began to be phased in November 1991.

Toxic Substances Control Act

The Toxic Substances Control Act (TSCA) of 1976 regulates the testing and manufacture of chemical substances and mixtures. TSCA remains in force through a continuing resolution. Section 4 of TSCA authorizes EPA to require testing of certain substances. Recently, EPA began streamlining efforts to target specific testing requirements and to expand the number of chemicals tested through an international program with the Organization for Economic Cooperation and Development. The Section 5 program requires companies to submit premanufacture notification for each new chemical. This requirement calls for review and testing by manufacturers. EPA has focused enforcement efforts on Section 5 violations, resulting in the assessment of several million dollars in civil penalties. Under Section 6, EPA can prohibit, limit, or ban the manufacture, process, and use of chemicals. EPA also collects information on substances and investigates under Section 8. Section 8(e) requires reporting of substantial risk information. EPA has the authority to assess civil penalties of up to $25,000 per day per violation.

Resource Conservation and Recovery Act

The Resource Conservation and Recovery Act (RCRA) of 1976 governs the management of hazardous waste from generation to disposal. In 1984, major changes were made to RCRA, including:

* A complete ban on land disposal of hazardous waste, unless no migration from the waste facility will occur for as long as the waste remains hazardous or the waste is treated to EPA established levels;

* Legally mandated deadlines under which congressional decisions become effective, even in the absence of EPA action;

* More stringent standards for the handling and disposing of hazardous waste;

* A schedule for EPA listing of additional categories of chemicals, plus criteria to make delisting more difficult; and

* Regulatory control of, and standards for, underground storage tanks.

In 1990, EPA implemented the land-disposal prohibitions required under the 1984 amendments. Regulations governing corrective action also were promulgated and will be implemented during the next few years. According to a study conducted for the CMA, the industry could pay $9 billion to $60 billion to clean up hazardous and nonhazardous waste sites during the next decade, depending on the program requirements. Environmental groups continue to monitor these sites.

Congress began the RCRA reauthorization in 1990 and may enact new legislation in 1992. As part of a general reauthorization of the law, Congress is considering such provisions as increasing control of nonhazardous solid waste and recycling.

Superfund

The Superfund Amendments and Reauthorization Act of 1986, which established a $9 billion, 5-year fund to pay for the continued cleanup of hazardous waste sites, was reauthorized in 1990. Most of the revenues for the fund are generated by $4.15 billion in taxes on industry sectors and a broad-based $2.5 billion corporate tax. General Federal revenue appropriations provide $1.25 billion during the 5-year period. Interest payments and cost recoveries from responsible parties at waste sites make up the balance of revenues.

Clean Water Act

The Clean Water Act of 1987 guarantees continued progress in ensuring high quality water. It prohibits the discharge of pollutants into navigable waters without a permit and increases the severity of civil and criminal penalties for violations of the act. Bills to reauthorize the act are under discussion in Congress.

Five regulations that have been written or promulgated could substantially affect the chemical industry. Guidelines limiting effluents were put forward in 1987, setting standards for discharging wastewater from chemical plants processing into U.S. waters or into sewer systems that lead to municipal treatment plants. Original costs of compliance, as estimated by EPA, were $841 million in initial capital costs and $504 million annually thereafter. A 1989 Appeals Court decision resulted in a remand of major portions of the legislation, saving or deferring millions of dollars in capital and operating costs.

A rule promulgated in 1990 establishes permits for storm water discharges from industrial facilities. Chemical companies are required to sample and monitor storm water runoff in compliance with EPA or state standards, resulting in significant compliance costs. The domestic sewage study regulations that were promulgated in July 1990 also add costs to the chemical industry. They establish new requirements for wastewater pretreaters(including a large number of chemical plants) that discharge into sewer systems.

Another significant proposal, made in February 1989, would set pollutant standards for sewage sludge. Indirectly, this would affect pretreaters discharging into sewage systems because it would regulate the amounts of various pollutants that are permitted in the sludge produced by municipal wastewater treatment. Therefore, the municipal treatment plants would be expected to impose more stringent limits on the industrial pretreaters.

Section 3041 of the Clean Water Act directs states to identify toxic "hot spots" in their waters and develop plans to alleviate pollution problems. States are establishing water-quality standards for 126 priority toxic pollutants under the act. In April 1990, EPA announced it would establish such standards for states judged to be in noncompliance. The Federal rule establishing these state standards is expected soon.

Safe Drinking Water Act

The 1986 Safe Drinking Water Act amendments require EPA to set standards for 83 chemicals on a phased, 3-year schedule. EPA has set National Primary Drinking Water Requirements (NPDWRs) for 9 of the contaminants and has proposed NPDWRs for 62 chemicals. Based on the amended definition of a "non-transient non-community water system," facilities supplying drinking water to workers must comply with the requirements. Of more significance, NPDWRs are also used in Superfund cleanups and RCRA corrective actions.

The amendments also provide for protecting groundwater quality around a public well. Although authorized, EPA has not requested funding for the Wellhead Protection Plan, citing Federal budgetary constraints. In spite of this lack of funding, about 20 states have submitted wellhead protection programs to EPA for approval.

Chemical Diversion and Trafficking Act

Chemical companies are subject to the Chemical Diversion and Trafficking Act passed in 1988 to address the problem of diverting chemicals to make illegal drugs. The law contains three key provisions: (1) the seller of chemicals must keep detailed records; (2) sellers must report suspicious purchases and unusual or excessive losses; and (3) the Drug Enforcement Administration is authorized to control export and import transactions.

Occupational Safety and Health

The chemical industry meets hazard identification standards established by the Occupational Safety and Health Administration (OSHA). The standards require extensive documentation of chemicals in trade and in the workplace and mandate warning labels on containers. In 1980, OSHA estimated the chemical industry's compliance costs at $719.8 million initially, plus about $400 million annually. In July 1990, OSHA released its proposed rule on process safety management, intended to prevent major industrial accidents while minimizing the consequences of accidents involving high-risk chemicals. The rule was made final at the end of 1991.

Other standards met by the chemical industry include OSHA's Hazard Communication Standard and state and local laws, which give workers the right to know about hazardous chemicals in the workplace. In addition to implementing the standards, the CMA is improving its methods for communicating product information through a uniform material safety data sheet that is receiving increasing global acceptance and could become an international standard.

The chemical industry also complies with OSHA's updated permissible exposure limits for about 600 hazardous substances. OSHA updated the limits, based on current health effects data, in January 1989.

Additional References

(Call the Bureau of the Census at (301) 763-4100 for information about how to order Census documents.) Current Industrial Reports, Manufacturers Shipments, Inventories and Others (monthly), U.S. Department of Commerce, Bureau of the Census, Washington, DC 20233. U.S. Merchandise Trade, FT900 (monthly), U.S. Department of Commerce, Bureau of the Census, Washington, DC 20233. Capacity Utilization (monthly), Federal Reserve Board, 20th and C St., NW, Washington, DC 20551. Telephone: (202) 452-3000. Producer Price Index (monthly), U.S. Department of Labor, Bureau of Labor Statistics, 600 E St., NW, Room 509, Washington, DC 20212. Telephone: (202) 272-5113. Synthetic Organic Chemicals, Annual Production and Sales, U.S.International Trade Commission, 500 E St., SW, Washington, DC 20436. Telephone: (202) 205-2000. Environmental Protection Agency, 401 M St., SW, Washington, DC 20460. Telephone: (202) 554-1404 - hotline information on chemical regulations.

COPYRIGHT 1992 U.S. Department of Commerce
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