Global Chemical Industry: The Top Performers

23 September 2002 00:00  [Source: ICB Americas]

There is no hiding from the fact that 2001 was the most difficult year in decades for the global chemical industry. North American petrochemicals producers hit the low point of the cycle in the fourth quarter, while their European counterparts followed suit in the early part of 2002. Asia struggled throughout the year, with Japan in particular remaining depressed.

Companies had to battle hard to cope with the impact of the deep recession in manufacturing, and that struggle has continued in 2002. In 2001, specialty chemicals makers saw markets in electronics and telecommunications slump; the chemicals sector followed the downturn in automobiles and construction. Even the fine chemicals business was dogged by the slowing rate of new drug development and the pharmaceuticals sector's own troubles in getting new products to market.

By the end of the year, business activity had slowed to a point where many companies decided that it was better to let 2001 slip into memory than to try to battle against the odds. Plants were shut down and factories closed.

Against this backdrop, the Reed Chemicals Group annual Top 100 survey does not make for comfortable reading. The survey reflects the full impact of the chemicals downturn, from the fall in sales for the key global players and the sharp impact on profits to the cutbacks companies found necessary.

Indeed, chemicals in 2001 were characterized by two things-the impact of the deepening manufacturing recession and the economic slump on business, and the way in which companies fought back by cutting costs and paying more obvious attention to the bottom line.

All the Reed Chemical Group publications and on-line services have worked together to compile data for the survey, which this year covers the top 150 producers of chemicals. The survey is truly global and aims to give readers a clear picture of the comparative financial performance of companies from very different parts of the world. Companies may operate in different segments of the industry, but it is easy to see from the comparisons made here that the downturn affected all players. Those few companies that made gains did so only with the help of radical restructuring.

Our main table is ranked by sales. Comparisons are made in local currencies but companies are ranked in US dollar equivalent terms using Federal Reserve Bank of New York exchange rates for the end of the reporting period. We have looked at the top chemical companies and taken corporate figures wherever appropriate to ensure we have as large a set of data as possible. In other cases, we have focused on the chemical operations of larger concerns such as the chemicals businesses of the major oil companies.

We have looked at operating profit data and comparisons to give a feel for comparative operating performance and charted firms' spending commitments to show how producers are investing for the future. Other data illustrate financial performance and shareholder returns.

The data clearly show how hard hit chemicals sales were in 2001 by the poor operating environment. Companies charted steep falls in volumes as well as in price. The average decline in sales for the top 50 companies was 4.1 percent. This is a significant number and it often took drastic action to stem the impact on operating performance.

The cuts came thick and fast in chemicals in 2001. Companies sought to maximize operating returns by ramping up efficiencies and curtailing discretionary spending. They put stops on capital projects and cut into research and development (R&D) investment. The impact of these actions will be felt this year and well into the future.

Companies in the US expected more from 2001 than they received. The same was certainly true in Europe, where a surprising degree of optimism prevailed until almost mid-year. As it turned out, companies were hoping against hope that US growth would help pull chemicals out of the doldrums. However, a spate of profit warnings in mid-year reflected reality and the fact that business in 2001 was going to remain tough.

The tragic events of September 11 in the US almost brought business to a halt for a while. The war in Afghanistan heightened global uncertainty. Indeed, the remainder of the year was extremely difficult.

The drop in sales led directly to a fall in operating profits of more than a third for the top 50. The steep decline in operating margins shows how difficult it was for companies to cut spending fast enough to cover the fall in revenues. The cutbacks shown here in SG&A (selling, general and administrative) costs give some idea of the extent of the constraint put on operations, or the efficiency increases driven through by most companies. Across the board, companies cut further than ever before. Employee numbers fell again. In 2001, the headcount reduction among the top 20 firms was on the order of 4 percent.

The industry has been applauded in some circles for the way in which it restrained spending on new plant and machinery and sought to give more money directly back to shareholders. Indeed, narrowing growth prospects in chemicals, the impact of the economic downturn and, perhaps more problematic, the continuing overhang from excess capacity-in some specialty sectors as well as in petrochemical markets-point to the validity of that position.

The raw data show how companies cut back on capital spending in 2001-the top US companies by 21 percent and the top European companies by 9 percent. The cutbacks highlight the fact that chemical producers are more wedded to attempts to produce more from less but also reflect the industry's position in the cycle. As cash flows improve, spending can be expected to rise again. Companies want to innovate more and some firms appear determined to maintain research investment to lift at least the potential for new growth. However, for many, 2001 saw a cut in R&D spending. The average fall in R&D spending for the top 50 players was 0.5 percent, which indicates a more significant cutback in real terms. The Reed Chemicals Group industry data, going back over more than two decades, show clearly that chemicals industry R&D spending has fallen in real terms in recent years, a disturbing longer-term trend for what claims to be an innovation-led industrial sector.

Mergers and acquisitions activity slowed dramatically in 2001 as large parts of the industry continued to pay the price from earlier expensive forays into new businesses. The table shows how hard hit many companies were in 2001 by high interest charges and illustrates at least one of the main reasons behind the drive by most firms to lift cash flows to help reduce debt burdens.

The credit quality of many companies in the sector, particularly in North America, has been closely scrutinized through this downturn and will continue to be as the sector slowly begins to improve from the low point. There is no doubt that some companies have been pushed to the brink and need a much more advantageous operating environment if they are to recover quickly.

That low point is exemplified by the bottom-line figures shown in the table. Thirty-seven chemical companies recorded a net loss in 2001-probably fewer than at the last low point in the cycle in the early 1990s, but a significant number nevertheless. By this measure, the companies hardest hit by the downturn in 2001 were in bulk chemicals and petrochemicals. Specialty producers were not exposed to the same pressures in the petrochemical cycle but were hit by the manufacturing recession in the US and the more widespread economic downturn.

Sector recovery has been apparent so far this year. Bulk chemicals and petrochemicals players particularly have recovered strongly on the back of rapidly filling product pipelines and inventories. Much the same can be said of the specialty chemical producers who have seen growth return. Concern remains, however, over the robustness of the economic recovery and when real market growth will take over as the key driver in chemicals.

In 2002, chemical companies have recorded sequential month-to-month and quarter-to-quarter improvements and have continued to constrain costs and discretionary spending. Comparisons will look better as the year progresses, but from the current standpoint, 2002 will be another difficult year for the sector. It is one, however, in which firms sincerely hope they will have seen the worst of the downturn and a return to some semblance of year-over-year growth. The RCG Top 100 analysis for 2002 will show whether they prove to be right.





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