ENERGY/U.S. PETROCHEMICAL INDUSTRY
Cheap oil feedstocks, the weakened U.S.
dollar and a plant utilization rate approaching 90 pct will
propel the streamlined U.S. petrochemical industry to record
profits this year, with growth expected through at least 1990,
major company executives predicted.
    This bullish outlook for chemical manufacturing and an
industrywide move to shed unrelated businesses has prompted GAF
Corp <GAF>, privately-held Cain Chemical Inc, and other firms
to aggressively seek acquisitions of petrochemical plants.
    Oil companies such as Ashland Oil Inc <ASH>, the
Kentucky-based oil refiner and marketer, are also shopping for
money-making petrochemical businesses to buy.
    "I see us poised at the threshold of a golden period," said
Paul Oreffice, chairman of giant Dow Chemical Co <DOW>, adding,
"There's no major plant capacity being added around the world
now. The whole game is bringing out new products and improving
the old ones."
    Analysts say the chemical industry's biggest customers,
automobile manufacturers and home builders that use a lot of
paints and plastics, are expected to buy quantities this year.
    U.S. petrochemical plants are currently operating at about
90 pct capacity, reflecting tighter supply that could hike
product prices by 30 to 40 pct this year, said John Dosher,
managing director of Pace Consultants Inc of Houston. Demand
for some products such as styrene could push profit margins up
by as much as 300 pct, he said.
    Oreffice, speaking at a meeting of chemical engineers in
Houston, said Dow would easily top the 741 mln dlrs it earned
last year and predicted it would have the best year in its
history.
    In 1985, when oil prices were still above 25 dlrs a barrel
and chemical exports were adversely affected by the strong U.S.
dollar, Dow had profits of 58 mln dlrs. "I believe the entire
chemical industry is headed for a record year or close to it,"
Oreffice said.
    GAF chairman Samuel Heyman estimated that the U.S. chemical
industry would report a 20 pct gain in profits during 1987.
Last year, the domestic industry earned a total of 13 billion
dlrs, a 54 pct leap from 1985.
    The turn in the fortunes of the once-sickly chemical
industry has been brought about by a combination of luck and
planning, said Pace's John Dosher.
    Dosher said last year's fall in oil prices made feedstocks
dramatically cheaper and at the same time the American dollar
was weakening against foreign currencies. That helped boost
U.S. chemical exports.
    Also helping to bring supply and demand into balance has
been the gradual market absorption of the extra chemical
manufacturing capacity created by Middle Eastern oil producers
in the early 1980s.
    Finally, virtually all major U.S. chemical manufacturers
have embarked on an extensive corporate restructuring program
to mothball inefficient plants, trim the payroll and eliminate
unrelated businesses. The restructuring touched off a flurry of
friendly and hostile takeover attempts.
    GAF, which made an unsuccessful attempt in 1985 to acquire
Union Carbide Corp <UK>, recently offered three billion dlrs
for Borg Warner Corp <BOR>, a Chicago manufacturer of plastics
and chemicals. Another industry powerhouse, W.R. Grace <GRA> 
has divested its retailing, restaurant and fertilizer
businesses to raise cash for chemical acquisitions.
    But some experts worry that the chemical industry may be
headed for trouble if companies continue turning their back on
the manufacturing of staple petrochemical commodities, such as
ethylene, in favor of more profitable specialty chemicals that
are custom-designed for a small group of buyers.
    "Companies like DuPont <DD> and Monsanto Co <MTC> spent the
past two or three years trying to get out of the commodity
chemical business in reaction to how badly the market had
deteriorated," Dosher said. "But I think they will eventually
kill the margins on the profitable chemicals in the niche
market." Some top chemical executives share the concern.
    "The challenge for our industry is to keep from getting
carried away and repeating past mistakes," GAF's Heyman
cautioned. "The shift from commodity chemicals may be
ill-advised. Specialty businesses do not stay special long."
    Houston-based Cain Chemical, created this month by the
Sterling investment banking group, believes it can generate 700
mln dlrs in annual sales by bucking the industry trend.
    Chairman Gordon Cain, who previously led a leveraged buyout
of Dupont's Conoco Inc's chemical business, has spent 1.1
billion dlrs since January to buy seven petrochemical plants
along the Texas Gulf Coast.
    The plants produce only basic commodity petrochemicals that
are the building blocks of specialty products.
    "This kind of commodity chemical business will never be a
glamorous, high-margin business," Cain said, adding that demand
is expected to grow by about three pct annually.
    Garo Armen, an analyst with Dean Witter Reynolds, said
chemical makers have also benefitted by increasing demand for
plastics as prices become more competitive with aluminum, wood
and steel products. Armen estimated the upturn in the chemical
business could last as long as four or five years, provided the
U.S. economy continues its modest rate of growth.
 Reuter
