Capital Spending - American Chemistry Council

The business of chemistry is a capital-intensive industry due to its large plant capacities (often needed to obtain economies of scale), the intricate nature of the equipment and processes used, the high degree of process automation, technology requirements and transportation and infrastructure costs.

Capital expenditures (“CapEx”) are funds used to purchase and/or maintain physical assets, such as structures and equipment. To a large degree, structures in the chemical industry protect chemical processes from the elements and support process equipment. Investment in structures is mostly for industrial buildings and related structures (loading docks, terminals, etc.). The equipment category is composed primarily of traditional process equipment such as fabricated metal products (pressure vessels, storage tanks, heat exchangers, pipe, etc.); general industry machinery (pumps, compressors, etc.); electrical transmission, distribution, and industrial apparatus; and other special industry machinery. A significant share of equipment spending in the business of chemistry is for instrumentation, computers and related automation and digital technologies.

Chemical Industry Capital Spending

Motivation for Capital Investment

Chemical companies have many reasons for investing in new plants and equipment. New capital needs include expanding production capacity for both new and existing products, replacing worn-out or obsolete plant and equipment and improving operating efficiencies. Other reasons for capital investment include energy savings, addressing changing environmental considerations and other initiatives needed to remain competitive.

Maintenance and repairs also require significant capital to keep plant operations efficient and safe. Of these expenses, about half are for labor and the other half for materials. As a share of shipments, maintenance spending tends to correlate with the operating conditions of the plant.

A long lead time can be required for funding, designing, and completing chemical industry capital spending programs. This makes short-run adjustments difficult, as capital investment cannot easily be turned on and off. Given its capital-intensive nature, however, the business of chemistry is highly sensitive to the costs of capital and the level of cash flow.

$32.6

Billion in capital investments

Information Technology

In a typical year, the U.S. chemical industry spends an average of 1-2% of the value of shipments on information technology (IT) investments. These investments recognize the productivity-enhancing benefits of IT to streamline the delivery of products and services, improve supply chain operations, conduct R&D activities, and increase organizational flexibility. New opportunities from machine learning, advanced analytics, artificial intelligence (AI) will propel the next tranche of spending on IT.

Foreign Direct Investment

American companies have a long-established presence in overseas markets. Europe accounts for the majority of the overseas chemical industry investment by American companies. Canada, China, Japan, India, Brazil, Singapore and Thailand are other key destinations. On the flip side, companies from around the world have recognized advantages to investing in the U.S. (known as foreign direct investment or FDI) and have built operations throughout the country.