Chemical Industry Due for Upturn in 5- to 7-Year Global Profit Cycle

ALTHOUGH the chemical manufacturing industry today lies at the bottom of what is usually a five- to seven-year global profit cycle, the time has arrived for an upturn, said H Patrick Jack, president and chief operating officer of Aristech Chemical Corporation, Pittsburgh, Pennsylvania.

Jack discussed the state of the industry at Chemical Week's 5th annual Chemical Transportation and Distribution Conference January 17-19 in Houston, Texas.

Using a bar graph from the Chemical Market Associates, a consulting firm, to depict the cycles, he noted that global profits are expected to begin an upward movement in 2000 and top out in 2003 before they begin to taper off again.

"The rapid changes in supply and demand drive the cycles," he said.

Throughout its history, the chemical industry has contended with the cyclical nature of the business. Don't expect that to change, Jack said. However, other changes are a given, particularly with Internet usage spreading. New customer-shipper relationships are being developed, and the demand for larger rail and tank containers is being addressed.

He predicted that chemical distributors will lead the way in using the Internet as an e-commerce vehicle followed by chemical manufacturers and their customers. The shipper/carrier relationship initially may require more direct person-to-person interaction than the more impersonal mode of the Internet, he noted.

Other changes are apparent in shipper-customer relationships. Developing more cooperation between shipper and customer for the benefit of both will include engaging customers in transportation negotiations. "That gives a sense of perspective for both sides," he said.

And as market demand increases, so will the need for larger rail hopper cars. The most significant change in size in the last 25 years occurred when rail cars with 6,600-cubic-foot capacity were introduced, he noted. Larger size does not come without some compromises, however. Larger (and heavier) cars will put stresses on an already inadequate railroad infrastructure. That means there will have to be significant infrastructure improvements.

The same holds true if tank trailer and tank container sizes were enlarged. Highway weight limits would have to be adjusted for heavier trucks; and like railroads, highway infrastructures would have to be improved.

That's for the future. For today, there are new chemical plants that are twice the size of their predecessors. "Super units may cause older units to shut down although old unit shutdowns are now minimal," he said. Larger plants with increased production can induce distribution bottlenecking, which means innovative ways must be found to improve transportation coordination. Complicating the situation are the many company mergers and acquisitions that occurred in the late 1990s. "The big are getting bigger and stronger," he added.

As railroad company mergers narrowed the field from about 40 to five or six, and resulted in service deterioration, there has been a 40%-60% increase in truck traffic. "This is partially a symptom of the economy, but it is also a result of (shippers) switching from rail to truck," he said. "Many shippers are now captive to one railroad carrier."

Jack said the Surface Transportation Board has been ineffective in ensuring railroad competition. Numerous pieces of legislation that address the problem are making the rounds in Congress. He encouraged members of the chemical industry to participate in the political process, and that includes becoming familiar with the issues and meeting with or writing to the representatives.

"It must be deregulation that enhances competition, and it must begin now," Jack said. "It will take a long time for industry to accomplish this, but we can do it by cooperation. Only by working together can we create a strong economy."

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