May 21, 2008 — Chemistry's Competitive Edge

Overseas demand bolsters West Virginia chemical firms, helping to counter mounting costs
By Betty Joyce Nash

While many industries now face higher energy costs, chemical producers in West Virginia are coping, thanks to strong export demand aided by the weak dollar.

Spikes in fuel prices can deliver a double blow to the U.S. chemical industry. Not only are transportation costs rising, but so are the prices of industry feedstocks, which are derived from natural gas.

Yet, while natural gas prices have jumped 49 percent since this time last year, they have not risen as dramatically as oil. That has given U.S. and Canadian chemical producers a competitive advantage because they depend on natural gas liquids rather than oil for feedstock. By contrast, Europe and Asia use petrochemicals derived from oil.

"The U.S. petrochemical industry is benefiting because natural gas prices in the United States are depressed relative to world crude oil prices," says Stephen Brown, an economist at the Federal Reserve Bank of Dallas. That makes American chemicals cheaper on global markets. "With the U.S. economy relatively weak, most of the gains are for export-oriented sales," Brown says.

DuPont, which operates one of its largest plants near Belle, W.Va., finished the first quarter with a 20 percent gain in earnings compared to the first quarter of 2007 largely because of its growth in emerging markets. Rising crop prices have also increased demand for its agricultural products.

Despite the comparative advantage of using natural gas-based feedstocks, some chemical producers are hurting. Bayer MaterialScience, another global firm with a major production facility in West Virginia, has seen prices of raw materials increase by
30 percent since 2005, according to site manager Glenn Kraynie. The company's New Martinsville plant makes materials used in polyurethane foam for furniture, bedding, carpeting, and other products.

Kraynie says passing along costs to customers is difficult because of competition. Instead, the firm has cut jobs and relied on automation to avoid or blunt price increases.

A PPG Industries plant in New Martinsville produces chlorine and other chemicals. The firm has preserved profit margins "due to escalating demand and rising prices of some of our products, but it is a growing concern," says Jim Rock, works manager.

West Virginia historically has had a strong chemical cluster located mainly in the Kanawha and Ohio River valleys. The industry employs about 10,000 people statewide.

In April, Tokyo-based Kureha Corp. broke ground on a new facility in the Mountain State that will produce a polymer resin that may be used to make plastic bottles. This adds to the state's substantial polymer manufacturing presence. The firm will locate at a business park developed at DuPont's Belle plant, which opened in 1925 and is the birthplace of nylon.

Chemicals from West Virginia are shipped to countries around the world, including the Netherlands, Canada, Japan, Brazil, and China. These products were valued at $1.5 billion, more than a third of the state's merchandise exports in 2007 and first among manufactured exports. Products shipped abroad included pharmaceuticals, cosmetics, fertilizers, and synthetic resins.

The relative price of natural gas has kept these West Virginia producers competitive. But that could change. Economist Kevin Swift of the American Chemistry Council points out that the reason for the relatively low price is that there have been no hurricanes or extreme heat or cold to knock supplies out of whack.

"In other words, a major weather event could crimp the supply and raise prices," Swift says.

Betty Joyce Nash is an economics writer in the Research Department of the Richmond Fed.