September 28, 2008

Chem Economics

By Swift, T Kevin

Chemistry on the Move Due to the geographic dispersion of American chemistry's customers and the concentration of most production in about a dozen states, a large volume of chemical products is moved within the U.S. and to foreign destinations every year.

The business of chemistry produces an estimated 1.27 billion tons of product every year. Of this, 450 million tons are consumed inside the plant gate. The remaining 816 million tons are shipped to customers via truck, rail, barge and other means; about 15% of this involves foreign commerce.

The volume of chemistry products moved within the U.S. is important to the transportation services industry, generating revenues for trucking companies, railroads, barge operators and other logistics suppliers. Many chemical companies also operate their own private truck fleets. The total cost of transportation to the chemical industry was $37.6 billion in 2007. As a result, logistics is important to American chemistry. Moreover, these figures understate that importance, as they exclude the estimated 290 million tons of raw materials (excluding air, natural gas, brine and water) brought into facilities.

In addition to the $37.6 billion logistics costs associated with carriers and chemical company fleets, companies in the business of chemistry incur administrative costs and inventory carrying costs (warehousing, financing, etc.). The results of an American Chemistry Council (ACC) analysis suggest that these costs add another $19.4 billion. As a result, the total cost of logistics for the business of chemistry is $57.0 billion, 8.6% of the value of shipments.

Globalization of supply chains during the past two decades has resulted in increasing trade in chemicals, as well as "lost chemistry" associated with the net imports of downstream end-use customer industries, a topic examined in the May 2008 issue of CEP (p. 17). During the past year, however, factors including the rise in oil prices, the low U.S. dollar, and rising costs in China and other low-wage nations have combined to significantly increase transportation costs, which affect decisions about plant location and inventory levels.

With the rise in transportation costs, more end-use customers are rethinking their global supply chain strategies as the costs of moving goods offset savings from low-wage production locations. Indeed, various U.S. customer industries (e.g., iron and steel) have regained competitive positions, and foreign direct investment in the U.S. has also increased.

Although globalization will not be reversed, orders might increasingly be placed with suppliers closer to home. Mexico, for example, could benefit from this potential alteration of world trade patterns. Domestic production would be supported as well. This could alter world trade patterns, and potentially add to domestic shipments and distribution of chemical products.

- T. Kevin Swift

American Chemistry Council

[email protected]

Copyright American Institute of Chemical Engineers Sep 2008

(c) 2008 Chemical Engineering Progress. Provided by ProQuest LLC. All rights Reserved.