IN AN era of expanded trade liberalization, exports have become the lifeblood of Canada's chemical industry. According to a recent survey by the Canadian Chemical Producers' Association (CCPA), exports of Canadian chemical products increased by 15% in 2000 and are expected to increase by another 15% in 2001, provided that the United States economic slowdown doesn't become a full-scale recession. United States markets account for 80% of the Canadian chemical industry's exports.
“Canada is what I call a 2% country — a small player in a big game,” says Dave Podruzny, CCPA's senior manager of business and economics. “Canadian chemical producers account for a $35-billion ($22-billion US dollars) share of the $2.4-trillion-a-year ($1.5-trillion US dollars) global chemical industry. We're fully behind enhanced trade. We need access to that huge market. Canada is very dependent on exports: 40% of our GDP derives from trade and a third of our jobs are trade-dependent.”
CCPA contacted five member-company representatives for their views on the importance of trade and exports to their companies' bottom line.
The export market is vitally important for Delmar Chemicals Inc, of Lasalle, Quebec. Delmar supplies most of its fine chemical intermediates to the multinational pharmaceutical industry in Europe and the United States.
“Our sales in the domestic market represent 5% or less of total sales, so obviously export sales are the major part of our business,” says Delmar's president Robert Dickinson. “Of that (export market), the United States market is the largest, the one where we're making the greatest expansion — something like 55% of our business.”
Basell Canada has two sites in Varennes (Quebec) and Sarnia (Ontario). Both sites manufacture polypropylene and are at about the same volume — producing 400 million pounds a year. Sixty-five percent of Varennes' production goes to the United States. About 35% of Sarnia's output is United States-bound, while 30% is sold to other export markets (mainly in Asia), according to Robert Richer, director of Basell Canada's Varennes plant.
More than 50% of Dow Chemical Canada's production in commodity chemicals is destined for export markets, says Claude-André Lachance, Dow Canada's director of government affairs. This applies mainly to the Fort Saskatchewan (Alberta) site, which exports 35% of its production to countries in the Far East. The US is also a significant export market for Dow Canada. Following completion of a merger agreement with Union Carbide Corporation in February, Dow also operates a manufacturing site in Prentiss, Alberta.
About 70% of NOVA Chemicals' polyethylene production in Canada is exported around the world, according to Gerald J Finn, vice-president of government and industry relations.
Shell Chemicals Canada Ltd exports to the United States and other markets are also very significant, compared to sales in the domestic market.
“We have a new world-scale plant here in Scotford (Alberta) and there is no way the Canadian market could sustain such a plant,” says Derric Ostapyk, Shell Chemicals Canada's manager of business integration. “On average, the domestic market only accounts for 10% of our total production capacity. From our new plant in Scotford, only 5% of the styrene we produce is sold in Canada while 95% is sold to the United States. For monoethylene glycol, 75% goes to Asia, 20% to the United States and (again) only 5% of the total volume is sold in Canada.”
As the wag said, when the United States catches a cold, Canada sneezes. The severe downturn in the United States economy is certainly having an effect on Canadian chemical producers.
Basell's Richer notes that: “So far, the slowdown in the United States is really affecting the throughput and the volumes that are being generated. We've shut down one line, reducing our output over the next 18 months by 500 million pounds.”
Like other Canadian chemical producers, Basell Canada is coping with a ‘double whammy’ situation: stagnating exports and higher energy costs.
“We're having difficulty passing additional high energy costs along to the consumer,” Richer says. “There is excess capacity right now, and everyone is trying to spread their fixed costs. Margins are very tight, which is not a good sign for us. We're getting it from both ends — higher feedstock prices and a lower price that we can charge for our final product, if we want to remain competitive in global markets.”
“The commodity chemical business is cyclical,” observes Dow's Lachance. “If the United States were to move into a full-fledged recession, it would impact our customers and, by extension, our sales. The difficulty is compounded by the rise in price of natural gas, which affects our feedstock and energy costs. We reckon that both situations are temporary, and that healthy growth will soon resume.”
NOVA's Finn concurs. “We had been anticipating a downward cycle, but the slowdown in the United States economy has been heightened by the extremely high cost of natural gas. Basically, a static supply coincided with a huge increase in demand, causing the price of natural gas to escalate dramatically. That has hurt the North America chemical industry a lot more than the slowdown in the United States economy, but the two factors coming together are even worse news. Our CEO has indicated that no polyethylene produced in North America is going to be competitive globally, because of these high natural gas prices. And we're beginning to experience sluggishness in demand as a result of either the reality or the expectation of a slowing economy.”
The trade surplus for chemical exports from the United States to the rest of the world was $31.2 billion ($20 billion US dollars) in 1999. In 2000, it was $12.5 billion ($8 billion US dollars). That decline, according to Finn, has been mainly the result of high energy costs. “I would say that NOVA's exports experienced that same kind of impact, in both the United States and Canada,” he sums up.
“It's a tough situation,” echoes Shell's Ostapyk. “We've seen things happen in Alberta that never happened before. Our feedstock cost — ethylene in particular, because it's natural gas-derived — has gone above the Gulf Coast price. That has never happened in our history, and it has affected us dramatically. We're continuing to operate at current rates, but it's certainly squeezing the margins and hurting us quite a bit.”
High natural gas prices are beginning to impact on the electricity market. In Alberta, most new power generation and all cogeneration capacity uses natural gas. As a result, electricity costs in Alberta have skyrocketed as well.
Shell Canada is sustaining increased production costs across the board. “The slowdown in the United States economy is starting to back us up a bit, especially for styrene,” Ostapyk explains. “We're starting to get some pushback for product going into the United States. Styrene is a precursor for polystyrene, and it's starting to back up in inventory at our client companies and at our production plant as well. It hasn't been to the point where customers are saying they don't want material, but it could soon really start to affect us.”
Slow First Quarter
Usually, in a normal yearly business cycle, January and February are slow, with business picking up in March. “This March, we're not seeing that pickup,” Ostapyk laments. “We're remaining in the doldrums. If the economy softens in Japan, that could just make a bad situation worse. Whatever happens in Japan — a huge buyer of North American chemical products — tends to affect all of Asia. It's very difficult to forecast short-term. The economies are kind of soft right now in the United States and Asia. And we really don't have a very good handle as to what's going to happen with natural gas prices for the balance of this year.”
Observes Delmar's Dickinson: “A recession in the United States will probably not have too much of an effect on us, because we are selling primarily to the global pharmaceutical industry. This is one of those industries that is more or less insulated from recessions. However, if there is a real long-term slowdown, companies that are now using part of their spare capacity to service other industries may try to move more of their capacity into the pharmaceutical area. In that sense, there can be an indirect effect. Certainly, available capacity increases competition and does have a negative effect on our industry, but short-term and with a relatively brief recession, I would not anticipate a major problem.”