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Chemicals: Industry hopes the worst is behind it
Sunday, March 25, 2001 By Stephanie Franken, Post-Gazette Staff Writer
In the past year, Pittsburgh chemical companies have invented prescription eyeglasses that change tint instantaneously, new acrylic material that can be used to make stronger and cheaper medical equipment, energy-conserving automotive windshields that improve fuel efficiency, and patches that protect cell phone users from their microwaves -- to name a few innovations.
During that same time, however, most chemical companies could not devise methods to protect themselves from the hard times that have pummeled their industry.
"It's impossible to make money, for a number of products," said Jeff Lipton, chief executive officer of Nova Chemical Corp., a commodity chemical and plastics company based in Moon. Calling January 2001 the worst month of his 26-year career, Lipton said a combination of high energy prices and a drop in demand was squeezing the industry.
Local companies PPG Industries Inc., which makes industrial coatings, glass, and fiberglass, and Bayer Corp., whose chemicals and polymers divisions make products ranging from plastics to fragrance components, also experienced trying times.
By most accounts, the economic downturn has hit the manufacturing industry the hardest. Chemical companies' economic health is closely tied to that of the manufacturers they supply with raw materials and basic products. So Nova, PPG, and Bayer all have taken hits recently, resorting to layoffs and plant closings in reaction to the slowdown in demand for their products.
Nova cut roughly 50 jobs at its Beaver County plant and its nearby research facility in Potter, and it closed a plant in Joliet, Ill., that employed 54.
Shortly before the new year, PPG announced layoffs in its coatings (paint) division, and it still has not disclosed the extent of the reductions.
Early last month, Bayer announced it would close a chemicals plant in Norwich, Conn., less than four months after it acquired the facility from Sybron Chemicals Inc. Nearly 30 jobs will be lost.
And Aristech Chemical Corp., formerly headquartered Downtown, was purchased last fall by Sunoco Inc. when it no longer could ride out the tough times. Sunoco announced it would terminate 120 employees shortly after the purchase.
Neville Chemical Corp. has not yet resorted to layoffs. But the end of 2000 and early 2001 have been difficult for the Neville Island-based producer of hydrocarbon resins. "We are considering a corporate reorganization with the aim of reducing costs. Part of that effort would include staffing reductions," said Van Dollar, Neville's chairman and president.
"The bad news, obviously, is that business is so horrible," said Nova's Lipton. "But the good news is that most people like to invest in a period where earnings are at their absolute worst and there is little risk that it's going to get worse. Everybody believes earnings are at the bottom."
So even as profits have lagged, and the chemicals industry has endured a recession, analysts and investors have begun to warm up to some of these companies, hoping to catch a bargain and ride their stocks back up.
PPG, for instance, has been a Wall Street outcast: Its stock performance has been more or less stagnant, earning it a spot on the Wall Street Journal's "The Laggard List" in late February as a poor performer for the past 10 years.
But at the same time, analysts started pumping PPG stock as a smart buy. Morgan Stanley Dean Witter analyst Les Ravitz upgraded his rating on PPG from "neutral" to "outperform." Standard and Poor's Corp. analyst Richard O'Reilly also voiced a positive opinion of the company.
"You'd have to call this an underperformance," O'Reilly said of PPG's stock, noting it was badly affected by investors' preferences for high-tech stocks and their bias against "dull old economy stocks" in recent years.
"I suspect what you really need is a real shift in the market, a shift in investor attitudes, and I think PPG would be a real beneficiary."
Nova, too, has received favorable marks, from Goldman Sachs' Avi Nash and also from Lehman Brothers' Sergey Vasnetsov, who said the company would keep its cash margins on the positive side in spite of "exceedingly difficult market conditions" in 2001. "The conditions in the industry have been the worst ever, but Nova has performed relatively well overall compared to its U.S. Gulf Coast-based competitors such as Lyondell and Millennium," wrote Vasnetsov in a recent earnings forecast.
For Bayer Corp., the North American headquarters of the German Bayer AG, the negative effects of a bad year for its chemicals divisions were cushioned by some of its pharmaceutical and life sciences businesses. Health care divisions account for 40 percent of Bayer's business, but were a main driver of Bayer profits in 2000.
With every rule, of course, there are exceptions. While late 2000 and early 2001 have been sobering times for the majority of chemical companies in Pittsburgh and elsewhere, those less-dependent on natural gas and oil fared somewhat better, points out Jim Cederna, president and chief executive officer of Calgon Carbon Corp., which makes chemicals and products that purify water, air and other substances.
Calgon Carbon relies primarily on coal -- not natural gas -- to make its products, and this gave it a significant advantage over the past 12 months. In early January 2000, natural gas was about $2 but it steadily rose to $10 by January 2001. These skyrocketing prices crippled most chemical companies, but Calgon Carbon was only moderately affected.
It also was buffered from the full impact of the downturn because most of its products -- such as chemicals that make table sugar white, carbon patches that protect cell phone users from microwave rays, and water treatment systems for homes or municipalities -- usually stay in demand. "People aren't going to compromise on the quality of their water" even during hard times, said Cederna.
Restructuring last year resulted in some layoffs, but employment is up 6 percent overall and the company is looking to hire engineers, he said.
By contrast, much of PPG's performance hinges on robust automotive and construction sectors. When hard times hit, both of these industries feel it as consumers shy away from buying new cars or homes.
To weather downturns more gracefully, PPG plans to build "a better mix of businesses" and create more "breakthrough technologies," said chairman Raymond W. LeBoeuf at a recent conference for chemical industry analysts and investors.
The company is pinning hopes on some recent inventions. Its new Transitions variable tint eyewear, which changes tint at the push of a button, has been an unqualified success, said Standard and Poor's O'Reilly. And PPG expects its new, energy-conserving Sungate windshields to become a big seller, said spokesman Jeff Worden.
Nova, too, says innovation plays a critical role in its fight to edge out competitors. Even though its end product is simply plastic or other raw materials, there are ways to make plastic better -- and competitive pressure demands that it keep improving its materials.
For example, Nova's NAS90, an acrylic copolymer, was designed as an alternative to regular acrylic, used to make medical products such as heart valves. Nova doesn't make the valves, but the company said its new acrylic copolymer allows those valves to be made more efficiently and for a lower cost, without compromising quality.
With the newest addition of Nova's corporate headquarters in early 2000, Pittsburgh has enhanced its position as a center for the chemicals industry.
Pittsburgh's proximity to customers such as Midwestern manufacturing companies, its quick airport access to most U.S. cities, the congenial relationships among local chemical company executives and a strong labor pool of chemical engineers all work to its advantage, local industry leaders say.
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