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Only a decade ago the U.S. was the world's top spot for making chemicals. Not only was it the largest market but it also had facilities that boasted the latest technology and the best knowhow. Most important, U.S. plants had a natural advantage, thanks to an abundant supply of cheap natural gas, a building block for plastics, fertilizers, and even pharmaceuticals. Today, none of that is true. Bigger, faster-growing markets are overseas. New facilities in the developing world are often as sophisticated and productive as those in America, if not more so. And in a crippling reversal, U.S. natural gas prices are the highest in the world. For the U.S., the likely results are less investment, fewer jobs, and fewer scientific discoveries.
With annual sales of $500 billion, U.S. chemical producers are too big to simply disappear, as have other industries such as consumer electronics or clothing. Indeed, after a few tough years, chemical sales have spiked thanks to the weakened dollar and a rebound in U.S. manufacturing. Dow had its best year ever in 2004 and anticipates even greater sales and profits this year. Still, execs at the Midland (Mich.) multinational concede that a big reason for Dow's record performance is its abandonment of high-cost operations at home. "The U.S. is becoming an island," says Dow CEO Andrew N. Liveris. "If energy prices stay at these levels, U.S. exports can't compete."
Dow is not alone. Across the industry, capital investment is being herded away from the U.S. toward the Middle East and Asia, where energy is cheaper and growth rates are faster, while U.S. plants are being turned over to salvagers. "We're in probably the most extreme economic environment the chemical industry has seen," says Jeffry N. Quinn, CEO of Solutia Inc. He should know: The St. Louis chemical company was driven into Chapter 11 in 2003 in part because of soaring raw material costs.
The industry's slippage affects more than national pride. Even in today's digital economy, chemical producers are essential to manufacturers, providing key ingredients for everything from hand soap to home insulation to hard drives. But as more and more of these goods are made offshore, the chemical industry is following suit. Chemical companies closed 70 facilities in the U.S. in 2004 and already have tagged 40 more for shutdown, according to a registry that Chicago-based BuildCentral Inc. posts for demolition outfits. Industry employment is now below 880,000, down from over 1 million as recently as 2002. And these are often well-paying jobs, with equipment operators earning $40,000 a year and chemical engineers averaging more than $75,000.
Meantime, of 120 chemical plants being built around the world with price tags of $1 billion or more, just one -- a 1,725-acre polyvinyl chloride plant in Plaquemine, La. -- is in the U.S., reports Independent Project Analysis Inc. China, by comparison, has 50. "The U.S. has gone from a privileged position to where it's hard to find a rationale to put anything here," says Edward W. Merrow, president of the Ashburn (Va.) capital-projects consultancy. As a result, the
nation's balance of trade in chemicals, a rock-steady surplus for 80 years, has become a deficit.
Innovation may be the nation's next casualty. Production facilities need engineers to run them and scientists to do workaday research. So as capital investment migrates, these tasks will, too. The concern among U.S. scientists is that offshore research and development centers will expand to encompass the deeper, basic research from which new products are born. "Innovations increasingly will be coming from abroad," says Donald B. Anthony, executive director of the Council for Chemical Research, a group of chemists from industry, government, and academia. Indeed, DuPont just opened a lab in Shanghai that will grow into a basic research center with 200 scientists within three years. And the company is mulling R&D facilities in India and Russia.
The chemical industry was born and took root in the U.S. largely because of its enormous reserves of hydrocarbons and other natural resources that could be transformed into new materials. The industry's low-cost inputs and outsize scale also gave it an edge on the global market. As recently as 1997, the U.S. posted a trade surplus in chemicals of almost $20 billion, even as it ran deficits in most other manufacturing sectors.
But at the start of this decade, the industry's hegemony abruptly ended. Orders collapsed, hurt by an unrelenting recession in manufacturing and by the exodus of industrial customers to China and other low-wage countries. The capper was the sudden leap in U.S. natural gas prices. Through the 1990s, gas prices were among the world's lowest, averaging $2 per million British thermal units (BTUs). But in 2000, U.S. prices shot up, because of unprecedented demand from new, gas-fired power plants. Today, with supplies still tight, gas costs $6 to $7 per million BTUs in the U.S. That compares with $5.25 in Europe, $4.50 in China and Japan, and $1.25 or less throughout the Middle East and Russia.
With neither imports nor new domestic supplies likely to close this price gap anytime soon, chemical companies are canceling projects here. Dow was set to expand an existing complex in Texas City, Tex. Instead, as the company's energy costs rocketed in the U.S., execs shut down two ethylene plants on the property and opted to build the new plant in Oman, where natural gas goes for $1 per million BTUs. The $1.5 billion project will produce polyethylene for the world market using the same state-of-the-art technology Dow had planned for Texas. "The Middle East and the Far East -- that's where all the builds are happening," says Dow's Liveris. "We are going to be part of that. We have to be."
For each facility U.S. companies build abroad, it seems two at home are shuttered. Dow has cut its North American headcount by 5,135, or 18%, to 23,325, and closed 11 facilities in the U.S. since 2002, including the surfactant plant in Nashua, which is now being razed. Industries must adapt or die. When it comes to chemicals, though, the U.S. industry is adapting abroad while withering at home.